TUTORIAL MFRS116

Note to students: These tutorial questions serve as materials for understanding the
requirement of syllabus coverage of MFRS116 under FAR270.

The exercise covers:

 Calculation of initial cost ( direct purchase and self-constructed)

 Accounting treatment of provision for future cost(decommissioning, dismantling cost
and restoration cost) and financing cost/borrowing cost
 Depreciation calculation
 Disposal of PPE without revaluation
 Disposal of PPE with revaluation
 Treatment of replacement cost (with calculation of carrying amount)
 Impairment loss calculation
 Treatment of subsequent measurement (Cost Model and Revaluation Model)
 Preparation of Movement of PPE schedule

Understanding the theory and requirement of MFRS116 is important and therefore, students
should understand the basic of definition, recognition, recording, measurement and
presentation and disclosure.

Students should be aware of the following with regards to calculation:

 Depreciation policy (Straight Line Method (on cost) yearly or monthly basis and
Reducing Balance Method (On net book value) yearly or monthly basis)
 Calculation of depreciation when company adopts cost model in its subsequent
measurement.
 Calculation of Assets Revaluation Reserve
 Calculation of subsequent measurement involving revaluation model
 Impairment of Assets
 Disposal of revalued PPE and non – depreciable and depreciable PPE
 Initial cost ( what is the relevant item to be included and what needs to excluded-
knowledge of capital expenditure and revenue expenditure)
 Carrying amount of PPE when there is a replacement to parts of PPE.
Student must be aware of the differences between cost model and revaluation model in
initial measurement and subsequent measurement of PPE. Therefore, reading the questions
carefully is important to see what is the depreciation policy and what is the measurement
policy adopted by the company for its PPE.

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QUESTION 1

UniTY Bhd is a growing garment manufacturer. Due to rapid expansion of its operation, the
current factory is not able to meet the increase in demand for their products. The company
has decided to build a bigger factory to increase its production to cater for the increase in
demand. On 1 April 2018, the company began constructing the new factory and it was
completed on 30 June 2019. The new factory was immediately in operation upon its
completion and expected to be used for 25 years. UniTY Bhd incurred the following costs in
relation to the construction of the new factory:

Type of cost RM
Site preparation cost 240,000
Direct material consumed 2,000,000
Labour cost 3,100,000
Testing of various processes 150,000
Engineering and technical overhead 220,000
Relocation of staff to new factory 110,000
General overheads 500,000

Of the materials used, RM500,000 is attributable to material inefficiencies. In addition to the

costs incurred above, UniTY Bhd also incurs interest on loan amounted to RM100,000,
taken to finance the construction of the new factory building. The company decided to
provide the depreciation on the factory based on its useful life, on monthly basis. UniTY Bhd
closes its books on 31 December each year.

Required:

a. i. Explain the accounting treatment of the financing cost amounted to

RM100,000 taken to finance the construction of the new factory building.

The interest on loan taken to finance the construction of new building shall be included in
the initial cost of the new factory building. However, the cost can only be capitalised during
the period of construction up to the period when factory building is ready for its intended use.

ii. Calculate the initial cost of the new constructed factory building.

The initial costs of the factory.

Type of cost RM
Site preparation cost 240,000
Material consumed (2,000,000 – 500,000) 1,500,000
Labour cost 3,100,000
Testing of various processes 150,000
Engineering & technical overhead 220,000
Financing cost of the construction (interest) 100,000
Total initial cost 5,310,000

iii. Calculate the depreciation expense for the new factory for the year ended 31
December 2019.
Depreciation = (RM5,310,000 /25) x 6/12

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 = RM106,200

b. On 27 December 2019, UniTY Bhd sold its old factory for RM3,000,000. The factory
was bought 10 years ago at a cost of RM1,250,000. Depreciation was estimated at
RM50,000 per year.

i. Justify whether UniTY Bhd can derecognise its old factory from its Statement
of Financial Position with the requirement as stipulated in MFRS116 Property,
Plant, and Equipment.
In accordance with MFRS116 Property, Plant, and Equipment, PPE shall be
derecognised:
1. On disposal, or
2. When no future economic benefits are expected from its use or disposal

In this case, UniTY Bhd may derecognised the old factory as the factory was
disposed by selling to third party . Therefore, the old factory is removed from the
SOFP.

ii. Advise UniTY Bhd on the accounting treatment for disposal of the old factory
building.

ii. The accounting treatment for disposal of the old factory building:
1. The accumulated depreciation of RM500,000 and its cost of RM1,250,000 are
eliminated company’s book.
2. Therefore, the carrying amount of RM750,000 is derecognised from the
SOFP.
3. The sales proceed of RM3 million is recognised as increase in the company’s
cash/bank.
4. The gain from disposal RM2,250,000 (RM3,000,000 – RM750,000) is
recognised as other income in SOPL

QUESTION 2

a. Buragaz Bhd, a local manufacturing company had purchased a piece of land in

Sepanggar, Sabah. The business constructed a factory in January 2017 and
completed the construction on 30 March 2018. Expenditure incurred and paid by the
business are as follows:

Date Expenditure Amount (RM)

January 2017 Cost of demolishing existing building on the
land 800,000
February 2017 Architect’s fees 75,000
Direct materials 2,500,000
Direct labour 950,000
Direct expenses 50,000
Estimated Decommissioning cost (Note) 850,000
General overhead cost 455,500
January 2018 Direct materials wastage during construction 25,000
February 2018 Cost of installing water and electricity 35,000
March 2018 Maintenance charges – 5 years contract 50,000

Note:

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 The estimated useful life of the factory is 30 years and depreciated on monthly basis.
After the 30 year, Buragaz Bhd is required to decommission the factory and the
present value is RM350,000.

Required:

i. Identify the initial cost of the factory on 30 March 2018.

Initial cost

Items RM RM

Architect’s fees 75,000

Cost of raw materials 2,500,000

Cost of direct labour 950,000

Direct expense 50,000

Construction cost 3,500,000

Raw materials wastage during construction (25,000) 3,475,000

PV decommissioning cost 350,000

Cost of installing water and electricity 35,000

INITIAL COSTS 3,935,000

ii. Identify the amount to be written off to the Statement of Profit or Loss for the
financial year ended 31 December 2018.

Amount to be written off to the Statement of Profit and Loss

Details RM
General overhead 455,500
Maintenance charges (50,000/5) 10,000
Depreciation [(3,935,000/30) x 9/12] 98,375

b. On 1 January 2018, one of the components of its heavy machinery used by Tumpung
Bhd in its production line was badly damaged. The heavy machinery was acquired on
1 January 2014 at a cost of RM3,000,000 with an estimated useful life of 10 years.
The damaged component had to be replaced at a cost of RM250,000. It is expected
that the new component will increase the machine’s production line, as well as
extending its remaining useful life to 8 years. The carrying amount of the damaged
component replaced was RM150,000. It is the policy of the company to charge

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 depreciation on all its non-current assets using straight-line method. The company
adopted the cost model for all its non-current assets.

Required:

i. Explain the accounting treatment of the heavy machinery on 1 January 2018.

The cost of the replacement component of RM250,000 will be capitalised

since the new component will increase the capacity and its remaining useful
life. The carrying amount of the old component of RM150,000 will be
derecognised.

ii. Calculate the carrying amount of the heavy machinery for the year ended 31
December 2018.

The depreciation charged for the year will be RM237,500 and the carrying
amount of the heavy machinery as at 31 December 2018 will be RM1,662,500.

RM
1 January 2018 Cost 3,000,000
Less: Acc Depn
[(3,000,000/10) x 4 years] 1,200,000
Carrying amount 1,800,000
Less: Old component (CA) (150,000)
1,650,000
Add: New component 250,000
1,900,000
Less: Depreciation
[1,900,000/8] (237,500)
31 December 2018 Carrying amount 1,662,500

c. Dogo Bhd acquired a piece of land and a machine for RM2,000,000 and RM500,000
respectively on 1 January 2015. The estimated useful life of the machine is 10 years
with no residual value. The company adopted the revaluation model for all its non-
current assets. It is the policy of the company to charge full depreciation in the year
of acquisition and none in the year of disposal. Revaluation is to be done every 2
years. The following is the information related to both non-current assets owned by
Dogo Bhd:

Land Machine
RM RM
31 December 2016
Fair value 1,900,000 450,000

31 December 2018
Fair value 2,200,000 300,000

Required:

i. Discuss the accounting treatment of the land as at 31 December 2016.

Support your answer with calculation.
Land

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 On 31 December 2016, there is a deficit on revaluation of RM100,000 (RM2,000,000
– RM1,900,000). The deficit will be charged to SOPL. The carrying amount on 31
December 2016 is RM1,900,000.

(Note to student: Land is non-depreciable asset)

ii. Discuss the accounting treatment of the machine as at 31 December 2016

and 31 December 2018. Support your answer with calculation.

Machine
On 31 December 2016, there is a surplus on revaluation of RM50,000
(RM450,000 – RM400,000). The surplus will be credited to Asset Revaluation
Reserves (ARR)/OCI. The accumulated depreciation of RM100,000 is
eliminated.

On 31 December 2018, there is a deficit on revaluation of RM37,500

(337,500-300,000). The deficit will be debited to ARR account. The
accumulated depreciation of RM112,500 is eliminated.

Workings - machine

RM

1 January 2015 Cost 500,000

Less: Acc Depn [500,000/10] x 2 yrs (100,000)

31 December 2016 Carrying amount 400,000

Surplus 50,000

Fair value/Carrying amount 450,000

Less: Acc depn [450,000/8(refer N1)] x 2 (N2)yrs (112,500)

31 December 2018 Carrying amount 337,500

Less: Fair value 300,000

Deficit 37,500

N1 – Remaining useful life is 8 years (10-2 years [1 Jan 2015 to 31/12/2016])

N2- 2016 – 2018 = 2 yrs

(Machine is depreciable asset)

iii Prepare the relevant journal entries on the revaluation of the land on 31
December 2018.

Journal entries
31 December 2018 Debit(RM) Credit(RM)
PPE: Land 300,000
ARR - Land 200,000
SOPL - Land 100,000

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d. In October 2016, Bidah Beauty Bhd (BBB), decided to diverse its operation by
introducing new range of beauty products that is expected to increase the profit of the
business. In order to facilitate the manufacturing process, the business acquired one
(1) unit of processing machine and one (1) unit of equipment from China on 1
October 2016. The processing machine and equipment each cost RM250,000 per
unit and RM300,000 per unit respectively. The estimated useful life of the processing
machine and equipment is 10 years and 5 years respectively. Both have zero
salvage value. The company uses straight line method of depreciation on a monthly
basis. The company adopted cost model for all its non-current asset.

On 1 January 2018, the company installed a special component costing a total of

RM80,000 for the processing machine. This is expected to increase the operating
capacity of the processing machine.

On 1 April 2018, the equipment was disposed off for RM180,000.

Required:

Construct a schedule to show the movement of the processing machine and the
equipment for the year ended 31 December 2018.

(Note for students: For this question, there are a few issues students need to
consider:

(i) Addition of component to the processing machine on 1 Jan 2018 amounting to

RM80,000

(ii) Disposal of equipment on 1 April 2018 for RM180,000

a. Schedule of movement of the non-current assets

Processing Equipment
Machine
RM RM
At cost or Valuation
As at 1 January 2018 – Cost 250,000 300,000
Addition 80,000
Disposal / Derecognition (300,000)
Balance as at 31 December 2018 330,000 0

Accumulated depreciation
As at 1 January 2018 31,250 75000
Disposal / Derecognition (N3) (90,000)
Charge of the year 34,143 15,000
Balance as at 31 December 2018 65,393 0

Carrying amount as at 31 December 2018 264,607 0

Workings:

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 Processing Machines RM Equipment RM
Cost 250,000 Cost 300,000
Acc. Depn Acc. Depn
(250,000/10) x1.25 31,250 (300,000/5)x1.25 years 75,000
years
Carrying amount 218,750 Carrying amount 225,000

CA 218,750 CA 225,000
Addition 80,000
298,750

Depreciation for the year Depreciation

298,750/ 8.75 (10-1.25) 34,143 300,000 / 5 x 3/12 15,000

N3 ( RM75,000 + RM15,000 = RM90,000)

QUESTION 3

A. Brickstyle Bhd is involved in manufacturing tiles in Bandar Jengka. One of the

machines used in its production is pressing machine. Due to increase in demand, the
company purchased a new pressing machine on 8 April 2018, at RM95,000. In
addition, the company also incurred installation cost of RM2,000, transportation cost
of RM1,000, and insurance cost of RM500. Two machine operators were sent for
training prior to the purchase of the machine at a cost of RM5,000 each. The
machine has a 10-year economic useful life and a salvage value of RM4,500. The
settlement of this acquisition is made by cheque.

The company depreciates all its machines on monthly basis, using a straight-line
method at the rate of 10% per annum. The company's financial year end is on 31
December every year.

Required:

i. Explain the accounting treatment of the training cost for the machine
operators.

Training cost incurred is not to be included in the computation of initial cost of

the machine. This is because this cost is not cost directly attributable in
bringing the machine its present location or condition, i.e. the training cost
does not add value to the machine, instead added value to human skills.
Hence the training cost is expense off in SOPL.

ii. Explain the condition which reducing balance method (RBM) is more
appropriate as the depreciation method of a machine.

RBM is more appropriate to be applied on the machine when the machine is

used up or consumed much faster in the earlier years and lesser in the
subsequent years.

iii. Calculate the initial cost of the machine.

The initial cost of the machine as at 8 April 2018.

RM

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 Purchase Price 95,000
Installation cost 2,000
Transportation cost 1,000
Insurance cost 500
Total initial cost 98,500

iv. Calculate the depreciation expense for the year ended 31 December 2018.

Depreciation expense for the year ended 31 Dec. 2018:

(98,500– 4,500) x 10% x 9/12 = RM7,050

v. Explain the capitalisation criteria of subsequent cost incurred on property,

plant and equipment.

e. i. Subsequent cost can be capitalised only if it enhances the value of the property,
plant and equipment, i.e. increase the future benefit of the existing asset beyond
its originally assessed standard of performance, which include:
1. An extension in the assets estimated useful life
2. An increase in output capacity
3. A substantial improvement in product quality or service potential
4. A significant reduction in previously assessed operating costs.

B. On 27 September 2018, an old drying machine broke down and was beyond repair.
The drying machine was purchased on 5 January 2011 at a cost of RM85,000. The
directors decided to dispose the machine and write it off from the company’s book.

i. Advise the management on the accounting treatment of the disposal of old

drying machine.

Eliminate the accumulated depreciation of RM65,875 (59,500 + 6,375) from

the cost of the machine of RM85,000. Since there is no future economic
benefit expected from machine, the carrying amount of RM19,125 is write off
and remove from company’s book (SOFP). The amount of RM19,125 is a
loss and recognised as expenses in Statement of Profit or Loss.

( Note to students: The above is a simple case of disposal involving depreciable asset
and calculation of depreciation up to date of disposal ie monthly basis)

QUESTION 4

A. Perotiga Bhd is a company involved in automotive industry located in Southern

Malaysia since 1998. Perotiga Bhd plans to expand its business by having another
factory building in Northern Malaysia and the company has already identified Kuala
Nerang as the location for its latest branch. Besides factory building, the company
needs to have new office building to run the business at Kuala Nerang. Perotiga Bhd
acquired the office building but the factory building needs to be constructed because
it requires specific features.

Perotiga Bhd acquired the office building on 1 July 2018 and commenced the
construction of the factory building on 1 January 2018. The construction would be

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 completed and it is ready to be used on 1 December 2018. The following are the
costs incurred to acquire the office building and to construct the factory building.

Office Factory
Items building building
RM RM
Purchase price 36,000,000 -
Legal fees 250,000 -
Consultancy fees paid to Smart Click Sdn Bhd 470,000 400,000
General administrative cost per year 360,000 500,000
Maintenance cost per year 200,000 8,000,000
Construction cost:
Material cost - 9,000,000
Labour cost - 4,500,000
Contractor’s fee - 12,000,000
Installation and technical cost 900,000 2,500,000

Perotiga Bhd received 5% trade discount for the office building. The consultancy fees
paid to Smart Click Sdn Bhd consists of consultation to Perotiga Bhd for the
acquisition of the office building amounting to RM470,000 and also consultation on
the training of new factory workers which amounted to RM400,000.

The material cost included the excessive wastage of material of RM800,000 whilst
the labour cost has already excluded the idle capacity of RM100,000.

The useful life of both office building and factory building is 50 years.

Required:

i. Identify the initial cost of the office building and the factory building in Kuala Nerang
on 1 July 2018 and 1 December 2018, respectively.

Office Factory building

Items building
RM,000 RM’000 RM’000
Purchase price 36,000 -
Less: Trade discount (1,800) -
Net purchase price 34,200 -
Lawyer fees 250 -
Consultancy fees paid to Smart Click Sdn Bhd 470 -
Construction cost:
Material - 9,000
Less: Excessive wastage (800)
8,200
Labour - 4,500
Contractor’s fee - 12,000
Installation and technical cost 900 2,500
Initial cost 35,820 27,200

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 B. Proten Bhd purchased a machinery costing RM500,000 on 1 January 2014 and the
machinery depreciated over 10 years. Proten Bhd spends RM10,000 per annum to
maintain the performance of the machinery.

On 1 January 2018, the machinery broke down. A detail inspection found out that
one component of the machinery is to be replaced. The carrying amount of the
replaced component was RM5,000. Proten Bhd incurred replacement cost of
RM8,000 for the new component. After the replacement took place, there was an
increase in the output capacity of the machinery.

Required:

i. Explain the accounting treatment for the cost of the new component and the
maintenance cost for the year ended 31 December 2018.

The replacement cost of RM8,000 should be capitalised as part of the PPE

because it enhances the value of the PPE (increase in output capacity).

The maintenance cost of RM10,000 should be expensed off in the SOPL

because it is to ensure the machinery is operating in their working order (to
maintain the performance of the machinery).

ii. Calculate the depreciation expense for the year ended 31 December 2018.

Depreciation for year ended 31/12/2018

(300,000 – 5,000 + 8,000) ÷ 6 = 50,500

Accumulated depreciation on 1 January 2018 = 500,000 ÷ 10 × 4 = 200,000

Carrying amount on 1 January 2018 = 500,000 – 200,000 = 300,000

C. Suzuku Bhd is a manufacturing company in Negeri Sembilan which owns two lands.
One land is situated in Senawang and the other land is situated in Seremban.
Suzuku Bhd purchased both lands in 1999. The information related to the two lands
is as follows:

Initial cost on Fair value on Fair value on 1

Asset
1 July 1999 1 July 2009 January 2018
RM RM RM
Land in Senawang 6,000,000 5,800,000 6,100,000
Land in Seremban 7,000,000 9,500,000 9,350,000

Suzuku Bhd also owns a self-constructed plant. The initial cost of the plant was
RM22,000,000. Once the construction has completed, Suzuku Bhd started the
manufacturing activity in the plant on 1 January 2003. On 1 January 2018, the fair
value of the plant was RM23,905,000.

In early 2009, Suzuku Bhd decided to expand its business and constructed an
administrative building in Seremban. On 1 January 2010, the initial cost of the
administrative building was RM800,000. In the middle of 2018, there was a huge
flood in Seremban and it had significant adverse impacts on the administrative
building where major parts of the building were damaged. Hence, Suzuka Bhd

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 conducted an impairment test on 1 July 2018. The fair value less cost to sell was
RM500,000 while the value in use was RM485,000.

Suzuku Bhd adopted the revaluation model for its property, plant and equipment and
depreciated over 50 years on monthly basis. The company closes its accounts on 31
December every year.
(Note to students: This question has issue on impairment of assets. See requirement (iii))

Required:

i. Prepare the journal entries to record transactions related to both lands on 1

January 2018.

Date RM RM
01.01.2018 Dr. PPE: Land in Senawang 300,000
Cr. SOPL 200,000
Cr. ARR/OCI 100,000

Dr. ARR/OCI 150,000

Cr. PPE: Land in Seremban 150,000

(Question relates to subsequent measurement treatment of non depreciable asset ie land

and respective asset revaluation reserve as company adopts revaluation model)

ii. Calculate the balance of the following accounts as at 31 December 2018

based on the information related to the plant above:

a. Plant account
b. Accumulated Depreciation account

a. Plant account = RM23,905,000

b. Accumulated Depreciation account = 23,905,000 ÷ 35 (N4)= 683,000

The previous balance has been eliminated against PPE account.

N4 – 35 years is the remaining useful life from 2017-2002 (50 years - 15 years)

iii. Discuss the accounting treatment of the administrative building on 1 July

2018.

On 1 July 2018, there was indicator of impairment loss. The impairment test is
conducted by comparing the CA of RM664,000 and RA (Recoverable
Amount) of RM500,000.

Therefore, there is an impairment loss of RM164,000 should be expensed off

in the SOPL.

The CA of the administration building shall be reduced to its RA of

RM500,000.

Workings:
Accumulated depreciation = RM136,000 (RM800,000 ÷ 50 × 8.5).
CA = RM800,000 – RM136,000 = RM664,000.

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 The RA is the highest of fair value less cost to sell of RM500,000 and the value
in use of RM485,000. Therefore, the RA is RM500,000.

D. Yamahu Bhd acquired a land, a building and an office equipment on 1 January 2016.
The information related to these non-current assets is as follows:

Office
Particular Land Building
equipment
Initial cost on 1 January 2016 (RM) 4,500,000 8,250,000 50,000
Useful life (years) Unlimited 50 5
Fair value on 1 January 2018 4,300,000 8,544,000 35,000
Revaluation Revaluation
Subsequent measurement Cost Model
Model Model

Yamahu Bhd sold the office equipment on 31 December 2018 at RM33,000.

Required:

Construct a schedule to show the movement of the land, building and office equipment for
the year ended 31 December 2018.
(5 marks)
( Note to students: In constructing the movement of PPE, students need to consider each
type of PPE and take note of information provided regarding the PPE. In this case:

(i) Land – Revalued (Subsequent measurement - Revaluation Model)

(ii) Building (depreciable asset) – Revalued (Subsequent measurement - Revaluation Model)
(iii) Office Equipment – disposed (Subsequent measurement - Cost Model)

Office
Land Building
equipment
RM RM RM
Cost/Valuation
Balance as at 1/1/2018 4,500,000 8,250,000 50,000
Less: Elimination of Accumulated - (330,000) -
Depreciation against PPE
Add: Surplus on Revaluation - 624,000 -
Less: Deficit on Revaluation (200,000) - -
Less: Disposal (50,000)
Balance as at 31/12/2018 4,300,000 8,544,000 0

Accumulated Depreciation
Balance as at 1/1/2018 - 330,000 20,000
Add: Charge for the year - 178,000 10,000
Less: Elimination of Accumulated - (330,000) -
Depreciation against PPE
Less: Disposal - - (30,000)
Balance as at 31/12/2018 - 178,000 0

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 Carrying value as at 31/12/2018 4,300,000 8,366,000 0

QUESTION 5

MCB Bhd is an established manufacturer of ceramic tiles and bathroom accessories. The
company decided to build a new factory catering to the increased demand of its accessories
products. The construction started on 1 January 2016 and was completed on 31 December
2016. The new factory is expected to be used for 20 years.

The costs incurred for the construction of the new factory building are as follows:

1. The contractor’s cost incurred by MCB Bhd amounting to RM2,000,000. The direct
material cost is RM850,000 and the cost of material wastage is worth RM70,000. The
cost of labour used in construction is RM450,000.

2. Other costs incurred:

RM
Engineer’s cost 95,000
Interest cost incurred to finance the construction 105,000
General administrative overhead allocated 60,000

3. In addition, the company also incurred architect fees at 10% of the contractor’s cost.

The company decided to provide the depreciation on the factory building at 10% per annum
on cost based on a yearly basis. MCB Bhd closes its books on 31 December each year.

Required:

a. i. Explain the components of initial cost of the new factory building.

Initial cost of the new factory building consists of:

1. All costs that relate specifically to the construction of the building (direct
materials less wastage, labour, contractor’s costs).
2. Costs that can directly incurred to the construction of building e.g. engineering
fee, architect fee and costs of borrowings taken to finance the construction of
the building.
3. General administrative overhead is excluded from the computation of initial
cost of building.

ii. Calculate the initial cost of the new factory building.

Initial cost of factory building:

RM
Contractor’s cost 2,000,000
Architect’s fees (10% x 2,000,000) 200,000
Direct materials (net : 850,000-70,000 ) 780,000
Labour used in construction 450,000
Engineer’s cost 95,000
Interest cost to finance construction 105,000

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 Total initial cost 3,630,000

iii. Calculate the depreciation expenses of the new factory building for the year
ended 30 June 2018.

Depreciation expenses as at 30 June 2018:

Depreciation = RM3,630,000 of X 5%

= RM 181,500

b. On 1 January 2018, MCB Bhd revalued its administrative building to RM9,400,000.

The cost of the administrative building was RM12,000,000 and the accumulated
depreciation on revaluation date was RM2,400,000.

i. Discuss the revaluation principles for items of property, plant and equipment.

a. Revaluation principles
1. Revaluation shall be performed regularly.
2. For item of property, plant and equipment that experience significant and
volatile changes in fair value may necessitate annual revaluation.
3. When an item of property, plant and equipment is revalued, the entire class of
property, plant and equipment to which the asset belongs shall be revalued.
4. The fair value of land and building is determined from market-based evidence
by appraisal undertaken by professionally qualified valuers.
5. If there is no market-based evidence of fair value, an entity may need to
estimate fair value using an income or a depreciated replacement cost
approach.

ii. Advise the company on the accounting treatment for the revaluation of the
administrative building.

Accounting treatment
1. Eliminate the accumulated depreciation of 2,400,000 from its cost,
RM12,000,000.
2. Hence the carrying amount of RM9,600,000 is derecognised from the
Statement of Financial Position.
3. The deficit on revaluation of RM200,000 is recognised as expense in
Statement of Profit or Loss .
4. The revalued amount of RM9,400,000 is recognised in company’s Statement
of Financial Position (deemed to be the carrying value as at 1 January 2018)

QUESTION 6

A. Define the term “recoverable amount” as stated in Paragraph 6 of MFRS 116 Property,
Plant and Equipment.

Recoverable amount is the higher of an asset’s fair value less costs to sell and its value
in use.

B. Champion Outdoor Centre Bhd, a company providing facilities for outdoor activity
enthusiasts, opened its first outlet in Gopeng, Perak in 2018. On 1 June 2018, the

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 company acquired outdoor equipment which comprised “flying fox” trails and canopy
walkways. Below are the payments made on the acquisition date for the outdoor
equipment:

RM
Designing of “flying fox” trails and canopy walkways 5,000
Delivery costs 5,000
Installation and testing of equipment 22,000
Purchase price of the outdoor equipment 95,000
Maintenance for the first 12 months 12,000
Staff training 3,000

In addition to the above payments, the company will incur cost for future restoration
obligation at the end of equipment’s service period, present value for future restoration is
RM10,000.

Required:

i. Identify the initial cost of the outdoor equipment.

i. Initial cost of the outdoor equipment:

RM
Designing of “flying fox” trails and canopy walkways 5,000
Delivery costs 5,000
Installation and testing of equipment 22,000
Purchase price of the equipment 95,000
Future restoration costs of the outdoor activity equipment 10,000
137,000

ii. Journalise the transaction of the initial cost.

DR CR
(RM) (RM)
Outdoor Activity Equipment 137,000
Cash / Bank (137k–10k-45k) 82,000
Provision for Future Costs 10,000

C. On 1 January 2017, Coolvest Bhd acquired a warehouse with an estimated useful life of
20 years for RM1,000,000. At the end of the financial year, the fair value of the
warehouse was determined at RM1,100,000.

However, a fire broke out at the warehouse in January 2018. The warehouse’s
recoverable amount was estimated at RM500,000.

The company adopts revaluation model for its property and its financial year ends on 31
December each year.

Required:

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 i. Compute any surplus or deficit on revaluation of the warehouse for the year
ended 31 December 2017.

a. Coolvest Bhd – Warehouse:

i. Revaluation as at 31 December 2017:

RM RM
Revaluation 1,100,000
(-) Carrying amount:
Cost 1,000,000
(-) Accumulated depreciation (1M/20yrs) (50,000)
Carrying amount (950,000)
Revaluation surplus 150,000

ii. Prepare journal entries to record the impairment of the warehouse in January
2018.

DR CR
(RM) (RM)
Dr Asset Revaluation Reserve 150,000
Dr Impairment Loss 450,000
Cr Accumulated Impairment Loss 600,000

D. Bushmedic Bhd acquired a large freehold land in Kulim, Kedah for RM20,000,000 in
early 2010. Later, the company constructed a RM10,000,000 ISO-certified laboratory on
the property as part of its expansion plan. The laboratory has been in operation since 1
January 2015 and it will be used for 50 years.

As at 31 December 2017, the overall fair value of the land decreased by 10% from its
original costs due to a slump in real property market in the area. However, there was no
change in fair value in respect of the laboratory.

A year later, the property market recovered and as a result, the fair values for both land
and laboratory were revalued at RM25,000,000 and RM11,000,000 respectively as at 31
December 2018.

The company adopts revaluation model for its property and its financial year ends on 31
December every year.

Required:

i. Discuss the accounting treatment of the land for the year ended 31 December
2017 and 31 December 2018. Support your answer with calculation.

Accounting treatment:
FYE 31 December 2017:
o Land:

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  For the financial year ended 31 December 2017, the company
needed to record a revaluation deficit of RM2,000,000 as an
expense in SOPL.
 The carrying amount as at 31 December 2017 was RM18,000,000.

FYE 31 December 2018:

o Land:
 For the financial year ended 31 December 2018 the company is to
record revaluation surplus of RM7,000,000
 RM2,000,000 of total revaluation surplus is recognised as a gain
in SOPL , and the balance of RM5,000,000 will be credited to
Asset Revaluation Reserve.The carrying amount as at 31
December 2018 was RM25,000,000.

ii. Discuss the accounting treatment of the laboratory for the year ended 31
December 2017 and 31 December 2018. Support your answer with
calculation.

Accounting treatment:
FYE 31 December 2017:
o Laboratory:
 The carrying amount as at 1 January 2017 was RM9,600,000
(10M-400k)
 Depreciation expense during the financial year was RM200,000
(10M/50yrs)
 The carrying amount as at 31 December 2017 is RM9,400,000
(10M-600k). No change in fair value.

FYE 31 December 2018:

o Laboratory:
 Depreciation expense during the year is RM200,000
 The carrying amount as at 31 December 2018 is RM9,200,000
 The company to recognise RM1,800,000 revaluation surplus and
credit the amount in Asset Revaluation Reserve

Computation:
Land:

31 December 2017: RM
Revaluation (90% x RM20m) 18,000,000
(-) Carrying amount: (20,000,000)
Revaluation deficit (2,000,000)

31 December 2018: RM
Revaluation 25,000,000
(-) Carrying amount: (18,000,000)
Revaluation surplus 7,000,000

Laboratory:

31 December 2017: RM
Cost 10,000,000

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 (-) Accumulated depreciation (10m/50y x 3y) (600,000)
Carrying amount (9,400,000)

31 December 2018: RM RM
Revaluation 11,000,000
(-) Carrying amount:
Carrying amount 1/1/2018 9,400,000
(-) Depreciation (200,000)
Carrying amount (9,200,000)
Revaluation surplus 1,800,000

E. Melati Bhd acquired a piece of equipment on 1 January 2015 at a cost of RM5,000,000.

On 1 January 2018, a major part of the equipment was replaced with a new part due to
technological change. The cost of the major part of the equipment was at 10% of the
original cost of the equipment. The company paid RM550,000 for the new part and
RM50,000 for its transportation and installation. The replacement increased the original
estimated useful life of the equipment from 10 years to 13 years.

The company’s financial year ends on 31 December every year.

Required:

Construct a schedule to show the movement of the equipment for the year ended 31
December 2018.

b. Melati Bhd: PPE movement FYE 31 December 2018:

RM
Cost
Opening balance – 1/1/2018 5,000,000
Addition (550k + 50k) 600,000
(-) Disposal (10% x 5m) (500,000)
Closing balance – 31/12/2018 5,100,000

Accumulated Depreciation
Opening balance – 1/1/2018 (5m/10y x 3y) 1,500,000
Depreciation during the year [(5m–1.5m)–(0.5m- 375,000
.15m)+0.6m) /(13y-3y)]
(-) Disposal ((10% x 5m)/10y x 3y) (150,000)
Closing balance – 31/12/2018 1,725,000

Carrying amount 3,375,000

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