BKAR2023 FINANCIAL ACCOUNTING AND REPORTING II (A232)

COMPREHENSIVE CASE 1:
PROPERTY, PLANT & EQUIPMENT; INVENTORY AND INTANGIBLE ASSETS

DUE DATE: 10 MAY 2024 (SATURDAY), 11.00 PM

Guidelines for submission:

1) The comprehensive case is group work. Please answer all questions.

2) Please write the details of all group members - name, matric number, class group on the
front page, and page number on the bottom of your answer document.

3) Your answer should be TYPED and saved in PDF file. Any scanned document must be
clear, easily readable, and complete.

4) Submit your answer via the Online Learning portal within the allotted time and period.
Only one submission per group will be accepted.

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Terpaling Hitech Berhad (THB) was established in year 1999 and listed on the Bursa Malaysia
on its fifteen years anniversary. The company dealings with the production of commercial and
industrial equipment. The company has its headquarters in Bayan Baru, Pulau Pinang and its
main factory located in Batu Kawan, Seberang Perai.

Property Plant and Equipment

The company reported its property, plant and equipment (PPE) as for the year 2023 as follows:

Land Buildings Vehicles Machinery

RM,000 RM,000 RM,000 RM,000
Cost
As at 1 January 2023 23,700 9,890 2,310 40,250
Additions - 730 990 6,100
Disposals / Write-off - - (100) (2,700)
As at 31 December 2023 23,700 10,620 3,200 43,650
Accumulated Depreciation
and Impairment
As at 1 January 2023 784 1,828 1,590 25,950
Annual Depreciation - 252 220 360
Disposals / Write-off - - (86) (1,990)
Reversal on Impairment (310) - - -
As at 31 December 2023 474 2,080 1,724 24,320
Net Carrying Amount 23,226 8,540 1,476 19,330

Included in the additional cost to the building were RM25,000 interest capitalised from the loan
taken specifically to finance the construction of the building. The loan was obtained in July
2021 and the final repayment of the loan is in June 2026. The construction has completed in
September 2023.

The company depreciates all its assets using the straight-line method. Due to the advancement
of the technology in the industrial equipment, there is a need for THB to do an impairment test
on its production machinery. The following information is related to the impairment test on
the company’s machinery:

Machine Cost (RM) Remaining Accumulated Market Price Present Value

Useful Depreciation less Selling of Future
Life (RM) Cost (RM) Cashflow
(Years) (RM)
RO6911 890,000 8 267,000 593,000 476,000
RS7077 1,230,000 6 492,000 600,000 639,000
AR134 1,010,000 15 252,500 805,000 799,000

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Inventories
As a commercial and industrial equipment supplier company, THB Bhd has grouped its
inventories based on the undertaking projects and their percentage of completion. Currently,
THB has two ongoing projects and one completed project. The following information is
available from the company’s inventory records as of 31 December 2023.

Projects % for Cost per unit Estimated Cost to sell

completion Units as at 31 selling price
December per unit (RM)
2022
Project A – 65% 60 87,000 90,000 11,000
Injection Molding
Project B – 45% 40 155,000 180,000 9,500
Extrusion Blow
Project C – Pipe 0% 30 475,000 520,000 32,000
Profile

Cost to complete per unit is estimated based on the % for completion x cost per unit as at 31
December 2023.

Intangible assets

On 31 December 2022, THB recorded an intangible asset, patent, at a revalued amount of

RM6,500,000. The patent is related to a sustainable technology in the commercial and
industrial equipment, which was developed by the R&D team of the company. The patent was
initially recorded at RM8,000,000 on 1 January 2019. The management of the company
expected that the estimated future benefits from the patent would be consumed evenly for the
next eight (8) years. In 2023, due to advancement of new technology, the company revalued
the patent to market value of RM4,000,000 and revalued the remaining useful life of the patent
to be two (2) years. Beside the patent, other intangible assets of THB consist of:

i. A customer list purchased on 1 April 2022 at a cost of RM680,000. The company

expected that 40% of the estimated future benefits from the customer list will flow
into the company in 2022 and the rest will be generated evenly in the next three (3)
years.

ii. The company acquired a legal title to an industrial equipment brand on 1 June 2020
for RM500,000. The legal life of the brand is five years but is renewable every five
years at little cost. The company intends to renew it continuously. One of the
company’s directors believes that the brand should be amortised and an impairment
test should only be carried out when the brand is renewed. In 2021, due to covid-19
pandemic the company is expected to lose 30% of the market share. However, it
has evidence that the brand product will generate positive cash inflows indefinitely.

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Mr. Lohan is a newly appointed Chief Operating Officer (COO) of THB. He is an accounting
graduate from the most eminent university in Malaysia. He never involve in any accounting
or auditing firms since his graduation. He experienced more on marketing and investment
activities than accounting. Thus, his knowledge of accounting is limited and not up-to-date.
During the presentation by Madam Kay, the Head of Accounting Depatment, Mr. Lohan was
expecting that the total interest from the bank loan taken to finance the newly completed
building, should be capitalised continuously until June 2026. Mr. Lohan was also arguing on
the practice of impairment on the machineries. He feels that it might have a negative effect on
the balance sheet and related financial ratios because it may have a lower market value than its
book value. He suggested that the impairment test should not be carried out during the use of
the asset and any loss would only be recorded on the date of the disposal of the assets. Mr.
Lohan believes that the carrying amount shown in the statement of financial postion is
sufficient to show the current value of the assets. Further, Mr. Lohan is also not literally agreed
with the use of LCNRV approach to determine the value of company’s inventory as he is in
the opinion that it might distort the company’s income data.

CASE INSTRUCTIONS (ANSWER ALL THE QUESTIONS):

1. Briefly explain to Mr. Lohan on the borrowing cost related to the construction of the
building, whether should be capitalise or expense. Support your explanations with the
related Malaysian accounting standard.

2. With regards to the argument on the impairment of the assets between Mr. Lohan and
Madam Kay:

(a) What is the issue facing Mr. Lohan and Madam Kay? (CTPS 1)
(b) Would the suggestion by Mr. Lohan affect THB reported assets? (CTPS 2)
(c) If you are Madam Kay, what would you do to overcome the issue? (CTPS 3)

3. Determine the impairment loss (if any) for all machineries.

4. Prepare the journal entries to record the impairment loss calculated in (3) above.

5. Compute the new annual depreciation for each of the affected machineries after the
impairment.

6. Prepare the journal entries to record the depreciation of each of the impaired machineries
at the end of 2023.

7. Determine the net realisable value (NRV) for inventories of THB as at 31 December
2023.

8. Determine the amount of write-down (if any) and prepare relevant journal entry.

9. Assume that as at 31 December 2023, the account of Allowance to Reduce Inventory to

NRV had a credit balance of RM485,000. Determine the amount of the gain or loss that
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 would be recorded due to the change in Allowance to Reduce Inventory at Net Realisable
Value as in (8). Prepare the related journal entry.

10. Assume that you are the Head of Accounting Department, explain to Mr. Lohan:

(a) What is net realisable value; and

(b) Explain the rationale for the use of the LCNRV rules it applies to inventories.

11. Identify subsequent measurement model adopted by THB to account for the patent.
Justify your answer. (CTPS 4).

12. Prepare journal entries necessary to record the necessary journal entries related to the
patent in year 2022 and 2023.

13. Prepare journal entries necessary to record the cost of the customer list and amortisation
expense in 2022 and 2023.

14. Prepare journal entries necessary for the brand in 2020 and 2021. Discuss whether THB
should record the amortization expense in 2020 and 2021. (CTPS 5)

“END OF QUESTION”

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 CRITICAL THINKING AND PROBLEM-SOLVING RUBRIC
Course Code and Name : _______________________________________________
Student Name (Matric No): _______________________________________________
Task : ____________________________________________________

CONTENTS

No. Traits Poor Fair Good Excellent Score

(0-3) (4-6) (7-9) (10-12)

1. Problem Unable to identify issue/problem Able to identify issue/problem with Independently able to identify Independently able to identify
Identification even with assistance. minimum assistance. issue/problem with clarity. issue/problem very clearly and
accurately.

2. Problem Analysis Unable to analyze issue/problem and Able to analyze issue/ problem but Able to analyze issue/problem and Able to analyze issue/problem
fail to define the contributing does not clearly describe the clearly describe some of the and clearly describe all the x2
factors. contributing factors. contributing factors. contributing factors.

3. Generation and Unable to generate and apply any Able to generate and apply new Able to generate and apply new Able to generate and apply new
Application new ideas, solutions, strategies or ideas, solutions, strategies or new ideas, solutions, strategies or new ideas, solutions, strategies or x2
new practices. practices with some assistance. practices without assistance. new practices with accuracy,
clarity and detailed.

4. Evaluation Unable to evaluate ideas, solutions, Able to evaluate ideas, solutions, Able to evaluate ideas, solutions, Able to evaluate ideas, solutions,
strategies or new practices. strategies or new practices with strategies or new practices with strategies or new practices x2
some reasonable assistance. minimum assistance. clearly and accurately without
assistance

5. Decision making Unable to make decision based on Able to make decision based on Able to make good decision based Able to make excellent decision
identified ideas, solutions, strategies identified ideas, solutions, strategies on identified ideas, solutions, based on identified ideas,
or new practices even with or new practices with some strategies or new practices with solutions, strategies or new
assistance. assistance. minimum assistance. practices without assistance.

Total Score: /96