MFRS 116: PPE

TUTORIAL QUESTION 1

A. Noras Bhd is a company involves in importing goods from Japan and repackaging the
goods for local market. On 1 January 2013, the company purchased a packaging machine
from Korea at the invoice price of RM250,000. The other costs incurred including the
transportation cost of RM2,500 and the shipment insurance of RM12,000. Noras Bhd also
incurred installation cost a of RM8,000. Upon delivery, the packaging machine was then
tested to ensure its efficiency. The testing cost was RM10,000. Annual maintenance cost
was expected to be RM15,000. Special training was conducted for employees to operate
the packaging machine amounted to RM8,800. It was expected that the useful life of the
packaging machine was 10 years. The company’s depreciation policy was on straight line
method on yearly basis. The residual value was RM10,000. At the end of its useful life, the
packaging machine has to be dismantled. The present value of the dismantling cost was
RM10,000.

On 1 January 2016, the production line experienced a disruption due to a breakdown of

the packaging machine. Upon inspection, the engineer discovered that a part of the
packaging machine costing RM30,000 was broken and needed to be replaced. Carrying
amount of the broken part was RM21,300. The company decided to replace the broken
part of the packaging machine with new part costing RM40,000. This replacement can
increase the current production capacity. On the same date after the replacement, Noras
Bhd review its useful life and the remaining life of the packaging machine was determined
to be 5 years with no residual value.

The company applies cost model for its property, plant and equipment.

Required:

a. Explain the initial measurement as prescribed in MFRS 116. (3 marks)

b. Calculate the initial cost of the packaging machine. Show all workings. (2 marks)

c. Show the journal entry upon recognition of initial cost. (2 marks)

d. Describe the recognition criteria as prescribed in MFRS 116. (3 marks)

e. Explain the accounting treatment for the transactions that occurred on 1 January
2016. (6 marks)

B. Power Bhd acquired a building for RM1,500,000 on 1 January 2015. The estimated useful
life of the building was 20 years. Depreciation was calculated based on monthly basis.
Power Bhd adopted the revaluation model for its property, plant and equipment. On 1
January 2017, the fair value of the building was RM1,400,000. As at 1 September 2017
the building was sold at RM1,425,000.

Required: Calculate the amount of gain/loss for the disposal above. (4 marks)
(Total: 20marks)