CONFIDENTIAL 1 AC/DEC 2016/FAR510

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE : FINANCIAL ACCOUNTING AND REPORTING 3

COURSE CODE : FAR510
EXAMINATION : DECEMBER 2016
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of four (4) questions.

2. Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by the
invigilator.

4. Please check to make sure that this examination pack consists of :

i) the Question Paper

ii) an Answer Booklet – provided by the Faculty

5. Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 8 printed pages
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CONFIDENTIAL 2 AC/DEC 2016/FAR510

QUESTION 1

DB Manufacturing Bhd is an established company where the nature of business is

manufacturing and marketing of leather goods. Provided below is the trial balance of the
company as at 30 June 2016:

Dr Cr
RM'000 RM'000
Freehold land at valuation on 1 July 2015 46,970
Building at valuation on 1 July 2015 45,000
Plant and machinery at cost on 1 July 2015 22,980
Accumulated depreciation as at 1 July 2015:
Building 5,000
Plant and machinery 9,192
Investment property 24,600
Intangible asset 18,784
Inventory at cost on 30 June 2016 18,380
Trade and other receivables 9,009
Bank 11,770
Ordinary share capital 50,000
Non-redeemable preference share capital 13,000
Revaluation reserve of freehold land at 1 July 2015 1,500
Revaluation reserve of building at 1 July 2015 1,000
Retained earnings at 1 July 2015 17,676
Long-term loan 12,300
Trade and other payables 4,798
Deferred tax 7,484
Revenue 632,300
Cost of sales 246,702
Rental income 6,000
Selling and distribution expenses 191,700
Administrative expenses 100,120
Finance costs 1,485
Preference dividend paid 250
Ordinary dividend paid 500
Tax paid 22,000
760,250 760,250

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The following additional information have not been accounted for by the company.

1. Freehold land and building were revalued on 30 June 2016 at their fair values of
RM48,470,000 and RM35,000,000 respectively. The remaining useful life of the
building was 40 years as at 1 July 2015. The freehold land and building have been
revalued before, but the company did not make an annual transfer from revaluation
reserve to retained earnings.

The property, plant and equipment are depreciated on a straight-line basis over an
estimated useful life as follows:

Building 50 years
Plant and machinery 10 years

Depreciations are calculated based on monthly basis and to be charged to

administrative expenses except for depreciation on plant and machinery which is to
be charged to cost of sales. The freehold land is not depreciated.

2. One of the machinery costing RM5,000,000 (carrying value of RM3,000,000) was

sold at RM3,500,000 on 1 July 2015. The machinery has a remaining useful life of 6
years as at that date. The machinery was immediately leaseback by the company
with the following terms:

Lease term 5 years

Annual lease payment RM1,000,000

The first lease payment is payable on 30 June 2016. Interest is to be allocated over
the lease term using the sum-of-digits method. The ownership of the machinery will
not be transferred to DB Manufacturing Bhd at the end of the lease term.

3. The company acquired an imported machinery on 1 January 2016 for EUR40,000.

Half of the amount was paid by the company at the date of acquisition by issuing new
ordinary shares and the balance is still unpaid. The exchange rates were as follows:

1 January 2016 EUR1 = RM4.50

30 June 2016 EUR1 = RM4.80

4. Inventories costing RM380,000 was valued at 30% below cost because the design
was outdated.

5. The tax expense for the year was estimated at RM23,500,000 inclusive of a
decrease in deferred tax of RM300,000.

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Required:

Prepare the following financial statements for DB Manufacturing Bhd in accordance with
MFRS101 Presentation of Financial Statements and other relevant Malaysian Financial
Reporting Standards:

a. Statement of Profit or Loss and Other Comprehensive Income for the year ended 30
June 2016. (Disclosure of Earnings Per Share is required)
(10 marks)

b. Statement of Changes in Equity for the year ended 30 June 2016.

(5 marks)

c. Statement of Financial Position as at 30 June 2016. (A note on property, plant and

equipment is required)
(15 marks)
(Total: 30 marks)

QUESTION 2

On 1 January 2013, Jitu Bhd received a government grant of RM5,000,000 for the purchase
of a machinery costing RM8,000,000. The useful life of the machinery was five (5) years.
The company adopts the deferred income method for the treatment of the government grant.
On 1 January 2015, the company fails to comply with the conditions attached to the grant by
the government.

On 1 July 2013, Jitu Bhd started construction of a 10-storey building in Gurun. The building
will be rented to third parties when it is completed. The building was expected to have a
useful life of 50 years with no salvage value.

In order to finance part of the construction, Jitu Bhd obtained a 3-year term loan of
RM15,000,000 from a local bank on 1 May 2013. The effective interest rate was 8% per
annum. On 1 January 2014, Jitu Bhd suspended the construction of the building due to
shortage of raw materials for 3 months. Since the construction was suspended, the company
temporarily invested part of the money on 1 January 2014 in a 6-month fixed deposit that
earned an interest income of RM300,000. The construction recommenced on 1 April 2014
after the raw materials were available for construction.

The building was finally completed on 30 September 2015 and was ready for its intended
use. The costs of construction excluding borrowing cost were RM28,000,000. The
construction cost also include rectification cost of RM100,000.

The newly completed building was rented out to third parties on 1 January 2016. However,
there are still many vacant units. The company then decided to occupy the vacant units.
The fair value of the building as at that date was RM30,000,000 and RM31,000,000 on 30
June 2016.

The company’s policy is to adopt revaluation model for property and fair value model for
investment property.

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Jitu Bhd has a plant which meets the criteria for classification as ‘held for sale’ in the
financial statements as at 30 June 2015. Due to the advancement in technology and new
technology plant being introduced in the market, Jitu Bhd’s plant is not up to mark. Jitu Bhd
is still committed to sell the plant, thus on 1 March 2016 decided to make modifications and
technological changes to the plant so that the plant will be competitive with the new plant in
the market. It will also increase the production capacity of the plant. The modification works
will take 6 months to complete. The modification cost will increase the carrying amount and
the company is not willing to reduce the price to it fair value. The plant was not sold as at 30
June 2016.

Required:

a. State the accounting treatment for the government grant for the year ended 30 June
2015, in accordance with MFRS 120 Accounting for Government Grants and
Disclosure of Government Assistance.
(5 marks)

b. List the costs that constitute the initial cost of the building upon completion.
(5 marks)

c. Discuss briefly the classification of the building based on the relevant Malaysian
Financial Reporting Standards.
(5 marks)

d. Explain briefly the accounting treatment for the change in fair value of the building
during the year ended 30 June 2016.
(Assuming that the building qualify as an investment property)
(5 marks)

e. Discuss whether the plant that was initially classified as ‘held for sale’ can still be
classified as ‘held for sale’ during the year ended 30 June 2016 in accordance with
MFRS 5 Non-Current Assets Held for Sale and Discontinued Operations.
(5 marks)
(Total: 25 marks)

QUESTION 3

FQue Beverages Bhd had successfully launched a new product, “AWAKE”, in January 2014.
“AWAKE” is an energy drink targeted for health conscious adults. The company spent
RM1,500,000 to develop the product which meets the criteria for capitalisation. The
company decided to amortize the cost for five years since it was confident that it can
penetrate the market as one of the top energy drink in Asia.

In July 2014, the business development unit of the company planned to produce another
health drink. The target market is for students by selling the idea of a drink for a fit body and
can sustained memory. The drink will be a low sugar and low caffeinated drink since the
company believed that students nowadays are also health conscious.

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A concept testing was run in September 2014 to get consumers’ feedback. A focus group of
15 students from various universities and colleges were interviewed to collect their feedback
on the idea of the product. An online focus group was also carried out to get a good
representative of the target market feedback. This test was carried out for three months and
the total cost of the whole process was RM50,000. The unit prepared a proposal and the
project was called “B’POWER” where a presentation of the test results and product
specification was conducted. The management agreed with the idea and concept presented,
and has given permission to begin product development.

The project was passed to the development unit on 1 January 2015. The company hired a
food chemist to help formulate the drink. The chemist was paid an annual salary of
RM150,000. Three lab assistants and two employees were also assigned to help in
developing the drink and they were paid monthly salaries of RM15,500. Until 30 June 2015,
the company had spent RM250,000 for ingredients, tasting and quality control.

Based on the tasting and quality test on the samples carried out in June 2015, the drink was
rejected since it did not meet the market standard and this might affect the future sales of the
drink. However, the company still continue to improve the taste and quality of the drink until
they succeeded in end of March 2016.

The drink was later named “B’POWER”. The company spent an additional RM720,000 on
ingredients, tasting and quality control before commercial production. “B-POWER” was
manufactured and launched into the market on 1 July 2016. The expected future economic
benefit from the new drink “B’POWER” is RM800,000.

However, on 1 May 2016, product “AWAKE” was withdrawn from the market after receiving
complaints from consumers due to the side effects of the product.

Required:

a. Explain briefly the disclosure for the amount spent on the test conducted by the
company before the drink “B’POWER” was developed.
(5 marks)

b. Discuss briefly the accounting treatment for the development cost incurred for project
“B’POWER” for the year ended 30 June 2015 and 30 June 2016. (Calculations for
the cost are not required)
(5 marks)

c. Calculate the development cost that can be recognised as an intangible asset for
project “B’POWER” for the year ended 30 June 2016.
(5 marks)

d. Comment on the accounting treatment for product “AWAKE” for the year ended 30
June 2016.
(5 marks)
(Total: 20 marks)

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CONFIDENTIAL 7 AC/DEC 2016/FAR510

QUESTION 4

Given below are the summarised statement of financial position of Picturesque Bhd.

Statement of financial position as at 30 June

2016 2015
RM’000 RM’000
Non-current assets:
Property, plant and equipment 8,496 6,672
Investment property 900 720

Current assets:
Short-term investment 60 -
Inventory 1,824 1,200
Trade receivables 1,056 864
Bank 1,804 -

Non-current assets held for sale 360 -

14,500 9,456
Equity:
Ordinary share capital 6,540 4,200
Asset revaluation reserve 1,380 840
Retained profits 4,512 2,160

Non-current liabilities:
Deferred tax 240 168
Finance Lease liability 420 520
Long term loan 100 -

Current liabilities:
Tax Payable 108 96
Finance lease liability 60 80
Interest payable 144 108
Trade payables 996 684
Bank overdraft - 600
14,500 9,456

Additional information:

1. Profit before tax is arrived at after charging finance cost of RM87,000 and
depreciation of RM360,000.The tax expense for the year is RM1,104,000.

2. The following information were related to property, plant and equipment during the
financial year ended 30 June 2016 :

A new equipment was acquired for RM240,000 and payment was made through
issue of ordinary shares.

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A plant with a carrying amount of RM420,000 was reclassified as ‘held for sale’
during the year.

The land was revalued resulting in a surplus of RM780,000.

The building was also revalued resulting in a deficit of RM240,000. The building has
a surplus of RM300,000 from previous revaluation.

3. During the year, the investment property valued at RM720,000 has been reclassified
as a property, plant and equipment. The fair value at the date of change in use was
RM714,000. The fair value model was adopted for the investment property.

4. The short-term investment qualifies as a cash equivalent.

5. Interim dividend of RM384,000 was paid during the year.

Required:

a. Prepare the statement of cash flows for the year ended 30 June 2016 using the
indirect method.
(20 marks)

b. Analyse the reasons that resulted in a positive inflow during the year ended 30 June
2016 from an overdraft during the year ended 30 June 2015.
(5 marks)
(Total: 25 marks)

END OF QUESTION PAPER

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