BKAR 1013 FINANCIAL ACCOUNTING AND REPORTING I (A191)

MINI CASE TOPIC 4 PROPERTY, PLANT AND EQUIPMENT

DUE DATE: IN CLASS [6/10/2019 (L); 7/10/2019(N)]

QUESTION 1

Qayfiq Bhd intended to expand its business. In order to do that, the company acquired a piece
of land for the use of constructing a new administrative building. The land was acquired
together with an old abandoned building. Details on the costs related to the land and building
construction are as follows:

RM
Cost of land purchased as a building site 750,000
Cost of land clearing 50,000
Old building demolition costs 45,000
Proceed from demolished old building 7,000
Professional and legal fees 37,000
Insurance during construction 3,000
Building permit fees 5,000
Construction costs 2,200,000
Cost of pavement, fences and parking lots 120,000
General expenses 250,000
Interest costs recognised during construction period 55,000

Professional and legal fees consist of expenses relating to transfer of ownership of land
totalling RM15,000, architect fees of RM21,000 and also title search fee of RM1,000.
Included in the general expenses are the salary for administrative staff amounting to
RM220,000 while the other RM30,000 is for the personnels that guarding the
construction site.

To accommodate the mission of improving productivity and efficiency, the company

also purchased new specialised machine and equipment with a combined price of
RM180,000 by issuing 50,000 units of ordinary share at RM3.60 per share. Based on a
reliable source, the market value of the machine and the equipment is RM150,000 and
RM50,000 respectively. Other costs paid during the acquisition of the machine
comprised of delivery cost at RM2,500, installation cost of RM4,500 and trial run
expense prior to actual production of RM6,500. The company also held an annual
technician training and safety program with a cost amounted to RM12,250.

Beside that, Qayfiq Bhd exchanged an old vehicle with a cost of RM140,000 for a new
vehicle with a fair market value of RM145,000. The accumulated depreciation for
the old vehicle is RM100,000 with an estimated fair value of RM35,000. Qayfiq Bhd
also pay cash RM110,000 as an addition to the transfer of the old vehicle.

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 REQUIRED:

(a) In accordance to MFRS 116 Property, Plant and Equipment, determine the
costs of (i) land, (ii) land improvement, and (iii) building incurred by Qayfiq
Bhd.

(b) Calculate the costs of machine and equipment accordance to MFRS 116
Property, Plant and Equipment and prepare the relevant journal entry (ies)
for these acquisitions. Show your calculations.

(c) Prepare the journal entries to record the exchange related to the vehicle
assuming that the exchange has commercial substance. Show your calculations.

QUESTION 2

SmartHealth Bhd (SH Bhd) is a pharmaceutical distributor which purchases prescription

medicines and other medical products directly from pharmaceutical manufacturers and
distribute across the country. During year 2017, SH Bhd has acquired three types of tangible
non-current assets.

The first non-current asset bought is a brand new machine that can facilitate medicines labelling
process using the new technology, thus increase the capacity of distribution per day. The
machine was bought on 15 April 2017 at a quoted price of RM4,000,000 on a term of 2/20,
n/60. SH Bhd paid the machine in the discount period. In addition, the following expenditure
incurred;
i. Installation cost of RM150,000 and cost of storage for the machine of RM75,000 as it
was delivered before the factory is ready for installation.
ii. Insurance of RM225,000 were incurred as the management seek to reduce the risk of
fire. Out of this amount, 25% was meant to secure the machine while it still in transit.
iii. Expense incurred to test the functionality of the installation amounting to RM300,000.
iv. Maintenance contract for the machine sign–up for the next three years amounting to
RM150,000.
v. The machine incurred a transportation costs of RM120,000 to bring it to the factory.
vi. Staff training costs to handle the machine amounted to RM180,000.

The second non-current asset acquired by SH Bhd is a two-storey building which to be used as
its warehouse. The value of the building was uncertain because the building was in poor
condition and also unique in its type. This building was bought on 31 May 2017 by issuing
50,000 units of shares to NOLA Bhd. Market value for a unit of share at the date was RM3.50
per unit.

The third non-current asset purchased by SH Bhd is a new van at the end of August 2017 from
FAST Bhd. This new van was exchanged with its old van which was bought in January 2015
at a price of RM24,000. It was depreciated at RM2,000 every year and its fair value at the date
of exchange was RM8,000. SH Bhd has the policy to fully depreciate its assets for a year if the
holding of assets in the particular year is more than 6 months. The new van lists for RM32,000
and FAST Bhd offered a trade-in allowance of RM9,000 for the used van. This exchange has
commercial substance.

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As a distributor, SH Bhd has to make sure that healthcare provider prescribes gets to the right
hospital, pharmacy or other healthcare facility safely, securely and reliably. Thus, for the past
10 months, SH Bhd has been conducting a research in developing a revolutionary new system
to enhance the efficiency of its existing distribution system. SH Bhd believes this project will
be a successful one and there are a few distributors companies who also show their interest to
buy this system. The cost to patent this system when its ready is estimated at RM70,000. So
far, SH Bhd has incurred RM175,000 to finance this project. However, as of company’s year-
end (December 31), this new system has not been marketed. This is due to an error which
requires substantial amount of work by the researchers to fix the problem.

REQUIRED:

(a) The three assets (machine, building and van) that acquired by SmartHealth Bhd during
the year 2017 have been categorized as tangible non-current assets under property, plant
and equipment. Briefly explain THREE (3) similar major characteristics of these assets
in accordance to MFRS 116 Property, Plant and Equipment.

(b) In accordance to MFRS 116 Property, Plant and Equipment, calculate the
acquisition cost of the (i) machine, (ii) building and (iii) van bought by SmartHealth
Bhd. Prepare the journal entries to record the transactions for SmartHealth Bhd.

QUESTION 3

A. Explain the definition and the recognition of property, plant and equipment based on
MFRS 116 Property, Plant and Equipment.

B. On 1 September 2019, Matahari Berhad acquired land with a small old building by cash.
The cost of the land and old building were RM160,000 and RM40,000 respectively
Shortly after acquisition, the old building was demolished at a cost of RM20,000 which
was net of RM3,000 received from the salvaged materials. Another cost of RM6,000
was incurred to clear the land. During the course of clearing the land, timber and gravel
were recovered and sold for RM4,000. The cost of RM12,000 was paid for paving the
parking lots which have an estimated useful life of 15 years. Additionally, Matahari
Berhad paid RM5,000 and RM900 for commission on real estate agent and fee for title
search respectively.

REQUIRED:

Calculate the cost of the land.

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C. Hafiz Bhd purchased the following assets during 2019.

1. Machinery A and Equipment A were purchased as a lump sum for RM104,000 cash.
The details are as follows:
Book value Market value

Machinery A 50,000 90,000

Equipment A 50,000 30,000

2. Equipment B was acquired by issuing 10,000 shares of RM1 par value ordinary shares.
The shares have a market price of RM25,000

3. Equipment C with a list price of RM15,000 was acquired on credit term 2/10, n/30 and
has been paid 8 days after the purchase date.

REQUIRED:

Prepare journal entries to record the acquisition of the assets.