AFAB233

Financial Accounting and Reporting 2

TUTORIAL: PROPERTY, PLANT AND EQUIPMENT

Question 1

An entity has the following items of PPE:

(a) Property A: a vacant plot of land on which it intends to construct its new administration
headquarters;
(b) Property B: a plot of land that it operates as a landfill site;
(c) Property C: a plot of land on which its existing administration headquarters are built;
(d) Property D: a plot of land on which its direct sales office is built;
(e) Properties E1–E10: ten separate retail outlets and the land on which they are built;
(f) Equipment A: computer systems at its headquarters and direct sales office that are
integrated with point-of-sale computer systems in the retail outlets;
(g) Equipment B: point-of sale-computer systems in each of its retail outlets;
(h) furniture and fittings in its administrative headquarters and its sales office; and
(i) shop fixtures and fittings in its retail outlets.

Required:

Consider, by discussing the following questions, whether the assets above should be shown as
separate classes of assets. Give reasons for your answers.

a) Should the land without a building be classified separately from the land with buildings?

b) Should the land that is operated as a landfill site be classified separately from the vacant land?

c) Are the entity’s retail outlets sufficiently different in nature and use from office buildings so as
to be treated as a separate class of land and buildings?

d) Since the computer equipment is integrated across the organisation, should it be classified as a
single separate class of asset?
Question 2

On 1 July 2015, Damai Bhd acquired a number of assets from Aman Bhd. The assets had the
following fair values at that date:

Plant A RM300,000
Plant B RM180,000
Furniture A RM60,000
Furniture B RM50,000

In exchange for these assets, Damai Bhd issued 200,000 shares with a fair value of RM2.95 per
share. The directors of Damai Bhd decided to measure plany at fair value under the revaluation
model and furniture at cost. The plant was considered to have a further 10-year life with benefits
being received evenly over that period, whereas furniture is depreciated evenly over a 5-year
period.

At 31 December 2015, Damai Bhd assessed the carrying amounts of its assets as follows:
 Plant A was valued at RM296,000, with an expected remaining useful life of 8 years
 Plant B was valued at RM168,000, with an expected remaining useful life of 8 years
 Furniture A’s carrying amount was considered to be less than its recoverable amount
 Furniture B’s recoverable amount was assessed to be RM40,000, with an expected
remaining useful life of 4 years.

Appropriate entries were made at 31 December 2015 for the half-yearly accounts.
On 15 February 2016, Damai Bhd made a bonus issue of shares: 5,600 shares fully paid to RM1
per share were issued from the Plant A asset revaluation surplus.

At 30 June 2016, Damai Bhd assessed the carrying amounts of its assets as follows:
 Plant A was valued at RM274,000
 Plant B was valued at RM161,500
 The carrying amounts of furniture less than their recoverable amounts.

Required:

Explain the accounting treatment and prepare the journal entries during 2015 and 2016 period in
relation to the non-current assets in accordance with MFRS116 Property, Plant and Equipment.
Question 3

Sentosa Bhd post-closing trial balance at 30 June 2015 included the following balances:

RM
Machinery control (at cost) 244,480
Accumulated depreciation 113,800
Fixtures (at cost; purchased 2 December 2012) 308,600
Accumulated depreciation – Fixtures 134,138

The Machinery Control and Accumulated Depreciation – Machinery Control accounts are
supported by subsidiary ledgers. Details of machines owned at 30 June 2015 are as follows:

Machine Acquisition date Cost (RM) Estimated useful Estimated residual value
life (years) (RM)
1 28 April 2011 74,600 5 3,800
2 4 February 2013 82,400 5 4,400
3 26 March 2014 87,480 6 5,400

Sentosa Bhd uses straight line depreciation for machinery and diminishing-balance depreciation
at 20% per annum for fixtures.

The following transactions and events occurred from 1 July 2015 onwards:

2015
July 3 Exchanged item of fixtures (having a cost of RM100,600; a carrying amount at
exchanged date of RM56,872; and a fair value at exchange date of RM57,140) for
a used machine (Machine 4). Machine 4’s fair value at exchange date was
RM58,000. Machine 4 originally cost RM92,660 and had bee depreciated by
RM31,790 to exchange date in the previous owner’s accounts. Sentosa Bhd
estimated Machine 4’s useful life and residual value to 3 years and RM4,580
respectively.

Oct 10 Traded in Machine 2 for a new machine (Machine 5) that cost RM90,740. A trade-
in allowance of RM40,200 was received and the balance was paid in cash. Freight
charges of RM280 and installation costs of RM1,600 were also paid in cash.
Sentosa Bhd estimated Machine5’s useful life and residual value to be 6 years and
RM5,500 respectively.

2016
April 24 Overhauled Machine 3 at a cash cost of RM16,910, after which Sentosa Bhd
revised its residual value to RM5,600 and extende its useful life by 2 years.

May 16 Paid for scheduled repairs and maintenance on the machines of RM2,370.

June 30 Recorded depreciation and scrapped Machine 1.

Required:

Discuss the necessary accounting treatment and prepare journal entries to record the above
transactions and events.
Question 4 (Adopted from pass mid-semester examination)

Networth Bhd established its business few years ago and have a financial year end 31 December.
Followings are the two classes of assets extracted from the company’s books:
Plant and machinery
The balance in the accounts show that the plant and machinery was acquired on 3 January 2013 at
a total cost of RM30,300,000 and has accumulated depreciation of RM5,757,000 at the end of
2014. The company adopt the revaluation model and apply 10% reducing balance method of
depreciation for this class of assets. An independent valuer assess the fair value of the assets at 31
December 2015 was RM24,000,000. At the end of 2016, Networth traded-in its machine with a
new machine costing RM38,800,000 and incurred installation cost of RM1,100,000. The trade-in
allowance was RM22,900,000 and the balance to be paid in cash.
Motor vehicle
The company adopt the cost model and apply the straight line method of depreciation for its motor
vehicle. On 29 December 2015, the motor vehicle met with an accident, thus, fair value less cost
to sell and value in use at the year-end was estimated at RM170,000 and RM180,000, respectively.
The motor vehicle have been used for three years and was acquired at a cost of RM290,000 with
initial estimated useful life of eight years and residual value of RM50,000. At the end of 2016,
extensive repairs on the motor vehicle was carried out for RM37,000 cash. Networth Bhd expected
that these repairs to extend the motor vehicle’s useful life by two years and residual value is revised
to RM59,000.
Required:
(a) For the plant and machinery, explain with journal entries the following:
(i) Depreciation and changes in fair value at 31 December 2015
(ii) Depreciation and trade-in at 31 December 2016.
[11 marks]
(b) For the motor vehicle, explain with journal entries the necessary accounting treatment for:
(i) Depreciation and impairment at 31 December 2015
(ii) Depreciation and extensive repairs at 31 December 2016.
[9 marks]
Question 5 (Adopted from pass mid-semester examination)

The relevant data for assets in Abrar Bhd as at 31 March 2016 are as follows:

Accummulated
Acquisition Date Cost Depreciation Carrying Value
Asset RM RM RM
Machine A 30 June 2012 20,000 7,500 12,500
Machine B 30 November 60,000 14,000 46,000
2013
Motor Vehicle 31 March 2015 50,000 10,000 40,000
Office Equipment 1 April 2014 2,000 720 1,280

Asset Method of Depreciation Subsequent

Measurement
Machine A & B Straight Line Method Revaluation Model
(expected useful life 10 years)
Motor Vehicle Reducing Balance Method (20%) Revaluation Model
Office Equipment Reducing Balance Method (20%) Cost Model

Additional information:

1. On 2 January 2017, machine A was traded in for a new one costing RM40,000. Abrar Bhd
had paid RM25,000 by cheque being the balance of purchase price for the new machine.
2. On 5 April 2016, Abrar Bhd assessed the carrying amounts of its assets as follows:
(i) Machine B was revalued at RM50,000, with an expected remaining useful life of 8
years.
(ii) The estimated recoverable amount for motor vehicle was valued at RM42,000.
3. On 31 March 2017, Abrar Bhd sold its office equipment for cash and received cheque by
RM1,200.
Required:

(a) Compute the depreciation charge for each of the asset for the year ended 31 March 2017.
[6 marks]

(b) Prepare the journal entries for the year ended 31 March 2017 to record:
(i) the acquisition of new machine
(ii) the revaluation,
(iii) the impairment loss (if any), and
(iv) the disposal of equipment
[7 marks]

(c) Explain the accounting treatment for the year ended 31 March 2017 in accordance with
MFRS116 Property, Plant and Equipment for:
(i) motor vehicle
(ii) machine B
[3 marks]

(d) Prepare Statement of Profit or Loss and Other Comprehensice Income (extract) for the
year ended 31 March 2017.
[4 marks]