BKAR1013 FINANCIAL ACCOUNTING AND REPORTING I (A211)

COMPREHENSIVE CASE 2:
PROPERTY, PLANT AND EQUIPMENT, INVENTORIES AND RECEIVABLES
DUE DATE: 19 DISEMBER 2021 (SUNDAY)

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) Two groups will present each case (based on the lecturer’s allocation). The presentation
would be held after submission.

4) Your answer should be TYPED and send in a combined PDF file. The scanned
document must be clear, easily readable, and complete. Photo is not allowed.

5) Submit your answer via the Online Learning portal → within the
allotted time and period, before 12.00 midnight, 19 DECEMBER 2021 (MYT). Only
one submission per group will be accepted.

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PART 1

Bio Beauty Bhd (BB) is a Malaysian company, established in 2010. It sells range of cosmetic
products for customers in Malaysia and South-East Asian countries. Since its inception, BB
has been very successful. With the increasing orders received by a company, BB has prepared
a land site to construct a new warehouse for the company’s operation. BB bought a three-acre
land with and old factory building in the year 2019 at the price of RM500,000. BB paid
RM2,000 for real estate taxes and RM1,500 real estate agent commission fees. The land
ownership transfer was just completed and an additional cost of RM30,000 was incurred for
clearing the site. BB received RM8,000 from the residual value of demolished the old
building. In order to ensure the safety of the property, BB incurred a cost totalled RM20,000
for installation of fences around the property. The plan has been arranged accordingly to
ensure that the warehouse could be constructed as soon as the site was ready. However, the
loan applied from CNN Bank was rejected and all related construction activities had to be
temporarily suspended. BB then made a new loan application with BNN Bank. While waiting
for the loan approval, the management team of BB decided to utilize the site to generate
additional income for the company. The site was rented out for car boot sales activities in the
morning and food truck operation at night. In the first month of operation, BB earned
RM80,000 related to rental service revenue and the related costs included RM4,800 for staff
salary, RM2,200 for administration expense and RM3,000 for other expenses. After one
month of operation, the bank loan was approved and BB immediately stopped the site renting
operation and continued with its initial intention to construct the warehouse. The total cost to
construct the warehouse, from excavation until completion, was RM880,000 (including
RM3,200 cost of inefficiencies caused by a labour strike). This cost excluded the revenue and
expenses related to the site rental operation. Since the rental revenue and expenses were
incurred on the construction site, Mrs. Tara, the accountant of BB was uncertain whether to
include these revenue and expenses to the cost of land or cost of the constructed warehouse.

You are required to:

(a) Identify the issue(s) faced by the accountant of BB.

(CTPS Question –Problem identification)

(b) Analyse the problem(s) faced by BB by referring to the MFRS 116 Property, Plant
and Equipment (Hint: Find the related paragraph in the standard).
(CTPS Question –Problem analysis)

Total revenue:
Particulars Amount (RM)

Earned Rental Service Revenue 80,000

Expenses

Staff salary 4,800

Administration expenses 2,200

Other expenses 3,000

Total Expenses (10,000)

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 Realized gain 70,000

Below are the details of total cost which can capitalize in construction of warehouse:

Initial Recognition Cost of Warehouse Amount (RM)

Land cost 500,000

Real Estate Taxes 2,000

Real Estates Agent Commission 1,500

Additional cost for clearing site 30,000

Installation of Fence around the Property 20,000

Receipt of Residual Value for Old Building demolish (8,000)

Subsequent Measurement

Other cost incurred for capitalization 334,500

Total Cost of Construction of Warehouse 880,000

(c) Help the accountant of BB to make a decision related to the above issue(s)
(CTPS Question - Generation of solution, evaluation and decision making).

PART 2

The Covid-19 pandemic that started in early 2020 has taken a toll on BB business
tremendously. By November 2020, its sales had declined by more than 50 percent, compared
to the same period for 2019. The management of BB were worried that BB would not be able
to reach its forecasted sales and profits for 2020. This was the main concern of the BB’s
management as their compensations are tied with the company’s profitability.

Since early November 2020, BB had been doubling its efforts to increase its sales. After
taking the necessary measures to increase its sales, BB, on 15 December 2020, managed to
secure a large order from a customer in Jakarta, Indonesia. The customer had specifically
informed BB that it would take delivery of the products in early January 2021. This large
order was a huge relief to the management of BB. Instruction was made to the account
manager to record the order amounting RM350,000 as sale revenue for year 2020.
Furthermore, instruction was made to record the products ordered by the customer as
inventory for 2020 as shipment would only be made in January 2021. Cost of the products
was RM60,000. However, the account manager had unintentionally made an error in
recording the inventory, which had resulted the ending inventory overstated by RM60,000.
BB’s financial year ends on 31 December.

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During 2020, the inflation had increased due to the Covid-19 pandemic. The increasing prices
had affected BB’s cost of production. The management of BB were concerned about
inventory valuation method during the inflationary period. Since its inception, BB has been
using the average-cost method to account for its inventories. The management of BB
considered to change to the FIFO method for financial year 2020 as the method is believed
could improve BB’s profitability during the inflationary period. The accountant, Mrs. Tara
had been asked to look into this matter. Following is BB’s statement of profit or loss.

Bio Beauty Bhd

Statement of Profit or Loss
For the year ended 31 December 2020
RM
(‘000)
Revenues 2,000
Cost of goods sold:
Beginning inventory 250
Purchases 450
Goods available for sale 700
Less: Ending inventory 200
Cost of goods sold 500
Gross profit 1,500
Administrative and selling expenses 400
Net income 1,100

You are required to:

(a) Discuss how BB’s profitability in 2020 and 2021 would be affected as it recorded the
order as sales revenue for 2020 and overstated ending inventory for 2020.
(b) Prepare the corrected statement of profit or loss for the year ended 31 December 2020.
(c) Compare the average-cost method and the FIFO method and discuss which method
would provide higher profit during the inflationary period.
(d) Discuss whether it is appropriate for BB to change the inventory valuation method in
order to improve its profitability.

PART 3

Mrs. Tara, the accountant of BB has reviewed the draft account for 2021 and noticed that the
company was in financial distress at the beginning of the year. Therefore, the company used
its account receivables as a means of obtaining cash to survive and go out of distress. The
following is information related to selected activities for the month of January until March
2021.

15 Jan The clients High Hope. Bhd. forwarded a notice to BB asking for longer credit period.
The sales amounting RM420,000 is for previous month sales. BB agreed to extend the
credit period and convert the remaining balance of account receivable to 12%, 120-day
Note Receivable.
1 Feb BB factored with recourse RM230,000 of account receivable for a cash proceed of

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 RM220,000 to the Future Bank Berhad. Future Bank Berhad withheld 5% of account
receivable as protection against sales return and allowance. The difference between
factored account receivable and cash proceed is considered as a finance charge.
29 Feb Future Bank Berhad managed to collect RM215,000 of the factored account
receivable, which include sales return and allowance of RM8,700. The remaining
balance of account receivable is uncollectible. Settlement of factored accounts
receivable was done on this date.
1 March BB assigned RM100,000 of its account receivable as collateral on a RM80,000, 12%
loan from Al Rajhi Bank Berhad. A commission of 7% on the face amount of loan was
charged.
30 March Collected RM85,000 of account receivable assigned and remitted it to Al Rajhi Bank
Berhad.

Mrs. Tara retraced the recording of the above transactions and she finds out that the related
transactions are properly recorded. Mrs. Tara also performed extensive review on the “notes
to account”. After reviewed the notes to accounts for Trade and Other Receivables, Mrs. Tara
noticed that the allowance for bad debts expenses for 2021 remained the same as previous
years. It provides clues to possible error in recording. For the past few years, 3% of account
receivables are estimated to be uncollectible and the company uses the percentage of
receivables method to estimate the bad debt expense. The following is the notes to the
accounts for trade and other receivables.
Trade and Other Receivables  2021 2020
RM RM
Trade receivables 1,850,000 1,600,000
Less: allowance for bad debt expenses 48,000 48,000
  1,802,000 1,552,000
Other receivables, deposits and prepayment 98,430 120,340
Total 1,900,430 1,672,340

You are required to:

(a) Prepare the journal entries for January 2020 until March 2020’s transactions for BB,
assuming these transactions were recorded properly by the company.
(b) Mrs. Tara in a view that the information stated in the notes to account for Trade and
Other Receivables provide clues to possible error in recording. Give your opinion
why Mrs. Tara came to that conclusion. Prepare the adjusting entries for 2021 bad
debt expenses. Show the updated notes to account for Trade and Other Receivables.
(c) Discuss the theoretical justification of the allowance method as contrasted with the
direct write-off method of accounting for bad debts that has been practiced by BB.
(d) Assume that the financial instability BB is facing was due to the company takes a
long time to collect receivables, which makes the company’s merchandise turnover
becomes very slow. The company notices a drop in cash flow, which requires the
management strategies in order to improve its current financial challenges. Apart from

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using receivables as means to obtain cash (e.g., using receivables as collaterals), Tara
seeks your advice as the company’s accountant for further details:
i. Suggest TWO discount methods for BB’s management to improve their cash
flow.
ii. Explain how the TWO discounts identified in (i) above would solve the
financial challenges that BB is facing.
iii. Explain the accounting treatment to record the TWO discount methods
suggested in (i) in the books of account.

END OF CASE

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Traits
1 Problem Identification
2 Problem Analysis
3 Conceptualization and
Generation of solutions
4 Evaluation
5 Decision making
Lecturer’s Name: ___________________________________________________ Date: ________________________
CONTENT (Critical Thinking and Problem Solving)
Poor
(0-3)
Unable to identify
issue/problem even with
assistance.
Unable to analyze
issue/problem and fail to
define the contributing factors.
Unable to generate any new
ideas and/or offer alternative
solutions.
Unable to evaluate
appropriate alternative
solutions.
Unable to make decision
based on identified ideas and
solutions even with assistance.
Critical Thinking and Problem Solving (C
Fair Good
(4-6) (7-9)
Able to identify issue/problem Independently able to In
with minimum assistance. identify issue/problem with id
clarity. cl
Able to analyze issue/ Able to analyze issue/problem A
problem but does not clearly and clearly describe some of an
describe the contributing the contributing factors. co
factors.
Able to generate new ideas Able to generate new ideas A
and/or provide alternative and/or provide alternative an
solutions with some solutions without assistance. so
assistance. cl
Able to evaluate several Able to evaluate several A
alternative solutions with alternative solutions with al
some reasonable assistance. minimum assistance. an
as
Able to make decision based Able to make good decision A
on identified ideas and based on identified ideas and de
solutions with some solutions with minimum id
assistance. assistance. as
TOTAL SCORE