Terrar Bhd is a company engaged in trading of motor vehicles. With increasing orders received by the company since its i
Posted: Tue Nov 16, 2021 9:00 am
Terrar Bhd is a company engaged in trading of motor vehicles.
With increasing orders received by the company since its
incorporation, Terrar Bhd is optimistic of a better sales growth in
the future. The company closes its account on every 31
December.
In order to meet customers’ demand for its product, the company
acquired the plant assets of Cosmic Sdn Bhd on 2 March 2013. The
plant assets consist of:
Cost (RM)
Land
3,200,000
Building
4,500,000
Warehouse 600,000
Terrar Bhd also incurred the following expenditure in cash
between 15 March and 15 May 2013:
Ordinary repairs to the
building
RM 17,000
Additions to the
building
RM 300,000
The building was estimated to have a useful life of 10 years
with no residual value. The company used straight-line depreciation
method for building and the company policy is to recognise
depreciation to the nearest whole year when assets acquired during
the first six-month are considered held for the entire year while
assets acquired during the last six-month are not considered in the
depreciation computation.
In early 2016, the company replaced the marble floor with wooden
floor and the cost was RM150,000 which extends the estimated life
of the building by two years. At the end of 2017, the building was
revalued at RM4,200,000 by the qualified appraisal agent. On 30
December 2018, ¼ of the building was sold to TK Sdn. Bhd. for cash
consideration of RM1,500,000
The company also constructed a warehouse on 1 April 2015. A
piece of land was purchased for the building construction with a
cost of RM123,000. On 1 April 2015, the company paid RM35,000 for
architect fees. The excavation work began during the first week in
April with payments made to the contractor in 2015 as follows:
Date
Amount of payment (RM)
30 June
2015
120,000
1 August 2015 116,400
31 December 2015 80,000
The construction was completed on 1 March 2016 and the last
payment of RM50,000 was made on the same date. To finance the
construction of the building, Terrar Bhd borrowed RM400,000 from
Zico Bank on 1 April 2015. The RM400,000 was a 10-year loan bearing
interest at 8%. Belalng Bhd had no other borrowings.
Terrar Bhd acquired a machine in 2013. It’s carrying amount as
at 31 December 2015 was RM68,500. There was a widespread adverse
publicity against product #334 such that the demand dropped
substantially. The company decided to report an impairment loss of
RM50,000 on 31 December 2015. The company estimates that the
present value of cash flows expected from the future use and
eventual sale of the asset at the end its useful life is RM70,000
and RM5,000, respectively.
Terrar Bhd has three main categories of inventories which are
HONDA motor, SUZUKI motor, and YAMAHA motor. At 31 December 2019,
the balance of Inventory account was RM3,450,000 and Allowance to
Reduce Inventory to NRV (credit balance) was RM250,000. The company
summarised the relevant inventory costs and market data at 31
December 2019 in the table below.
Inventory
Cost (RM)
Sales Price (RM)
Selling cost (RM)
HONDA motor
1,500,000
1,380,000
90,000
SUZUKI motor
1,200,000
1,150,000
60,000
YAMAHA motor
750,000
845,000
30,000
As a new account assistant, Miss Fizah has been assigned to
calculate the amount that should appear on Terrar Bhd’s financial
statement for inventory under the lower-of-cost-or-NRV (LCRNV) rule
as applied to each item in inventory. The company applies the loss
method and uses an Allowance Account to record for the write down
of the inventory to net realisable value (NRV).
However, Madam Rabiatul, Terrar Bhd’s accountant had an argument
with Mr. Zaman, senior accountant of the company regarding the
method to be used to record the write down of the inventories.
Madam Rabiatul wants to use the loss method to write down inventory
because it is more clearly discloses the decline in the net
realisable value and does not distort the cost of goods sold. But,
Mr. Zaman prefers the cost-of-goods-sold method to write down
because it does not call attention to the decline in net realizable
value.
On 31 December 2018, the Terrar Bhd recorded an intangible
asset, patent, at a revalued amount of RM6,500,000. The patent is
related to a new sustainable technology in the motor engine, which
was developed by the R&D team of the company. The patent was
initially recorded at RM8,000,000 on 1 January 2016. 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
2019, due to the new competition in the market, the company
revalued the patent to market value of RM4,000,000. Due to this
latest development the company revalued the remaining useful life
of the patent to be three (3) years. Beside the patent, other
intangible assets of Terrar Bhd consist of:
REQUIRED:
1.
Identify subsequent measurement model adopted by Terrar Bhd to
account for the patent. Justify your answer
2.
(a) Prepare journal entries necessary to record
the necessary journal entries related to the patent in year 2018
and 2019.
(b) Prepare journal entries necessary to record
the cost of the customer list and amortisation expense in 2017 and
2018
(c) Prepare journal entries necessary for the
brand in 2018 and 2019. Discuss whether Terrar Bhd should record
the amortisation expense in 2018 and 2019.
With increasing orders received by the company since its
incorporation, Terrar Bhd is optimistic of a better sales growth in
the future. The company closes its account on every 31
December.
In order to meet customers’ demand for its product, the company
acquired the plant assets of Cosmic Sdn Bhd on 2 March 2013. The
plant assets consist of:
Cost (RM)
Land
3,200,000
Building
4,500,000
Warehouse 600,000
Terrar Bhd also incurred the following expenditure in cash
between 15 March and 15 May 2013:
Ordinary repairs to the
building
RM 17,000
Additions to the
building
RM 300,000
The building was estimated to have a useful life of 10 years
with no residual value. The company used straight-line depreciation
method for building and the company policy is to recognise
depreciation to the nearest whole year when assets acquired during
the first six-month are considered held for the entire year while
assets acquired during the last six-month are not considered in the
depreciation computation.
In early 2016, the company replaced the marble floor with wooden
floor and the cost was RM150,000 which extends the estimated life
of the building by two years. At the end of 2017, the building was
revalued at RM4,200,000 by the qualified appraisal agent. On 30
December 2018, ¼ of the building was sold to TK Sdn. Bhd. for cash
consideration of RM1,500,000
The company also constructed a warehouse on 1 April 2015. A
piece of land was purchased for the building construction with a
cost of RM123,000. On 1 April 2015, the company paid RM35,000 for
architect fees. The excavation work began during the first week in
April with payments made to the contractor in 2015 as follows:
Date
Amount of payment (RM)
30 June
2015
120,000
1 August 2015 116,400
31 December 2015 80,000
The construction was completed on 1 March 2016 and the last
payment of RM50,000 was made on the same date. To finance the
construction of the building, Terrar Bhd borrowed RM400,000 from
Zico Bank on 1 April 2015. The RM400,000 was a 10-year loan bearing
interest at 8%. Belalng Bhd had no other borrowings.
Terrar Bhd acquired a machine in 2013. It’s carrying amount as
at 31 December 2015 was RM68,500. There was a widespread adverse
publicity against product #334 such that the demand dropped
substantially. The company decided to report an impairment loss of
RM50,000 on 31 December 2015. The company estimates that the
present value of cash flows expected from the future use and
eventual sale of the asset at the end its useful life is RM70,000
and RM5,000, respectively.
Terrar Bhd has three main categories of inventories which are
HONDA motor, SUZUKI motor, and YAMAHA motor. At 31 December 2019,
the balance of Inventory account was RM3,450,000 and Allowance to
Reduce Inventory to NRV (credit balance) was RM250,000. The company
summarised the relevant inventory costs and market data at 31
December 2019 in the table below.
Inventory
Cost (RM)
Sales Price (RM)
Selling cost (RM)
HONDA motor
1,500,000
1,380,000
90,000
SUZUKI motor
1,200,000
1,150,000
60,000
YAMAHA motor
750,000
845,000
30,000
As a new account assistant, Miss Fizah has been assigned to
calculate the amount that should appear on Terrar Bhd’s financial
statement for inventory under the lower-of-cost-or-NRV (LCRNV) rule
as applied to each item in inventory. The company applies the loss
method and uses an Allowance Account to record for the write down
of the inventory to net realisable value (NRV).
However, Madam Rabiatul, Terrar Bhd’s accountant had an argument
with Mr. Zaman, senior accountant of the company regarding the
method to be used to record the write down of the inventories.
Madam Rabiatul wants to use the loss method to write down inventory
because it is more clearly discloses the decline in the net
realisable value and does not distort the cost of goods sold. But,
Mr. Zaman prefers the cost-of-goods-sold method to write down
because it does not call attention to the decline in net realizable
value.
On 31 December 2018, the Terrar Bhd recorded an intangible
asset, patent, at a revalued amount of RM6,500,000. The patent is
related to a new sustainable technology in the motor engine, which
was developed by the R&D team of the company. The patent was
initially recorded at RM8,000,000 on 1 January 2016. 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
2019, due to the new competition in the market, the company
revalued the patent to market value of RM4,000,000. Due to this
latest development the company revalued the remaining useful life
of the patent to be three (3) years. Beside the patent, other
intangible assets of Terrar Bhd consist of:
REQUIRED:
1.
Identify subsequent measurement model adopted by Terrar Bhd to
account for the patent. Justify your answer
2.
(a) Prepare journal entries necessary to record
the necessary journal entries related to the patent in year 2018
and 2019.
(b) Prepare journal entries necessary to record
the cost of the customer list and amortisation expense in 2017 and
2018
(c) Prepare journal entries necessary for the
brand in 2018 and 2019. Discuss whether Terrar Bhd should record
the amortisation expense in 2018 and 2019.