ACT 3101 – FINANCIAL ACCOUNTING AND REPORTING 1
Tutorial 5: PPE
Question 1
Question 8: Application Exercises, FAR 1 (page 192)
Question 2
Indicate whether each of the following expenditures should be classified as land (L), land
improvements (LI), buildings (B), equipment (E), or none of these (X).
_____ 1.
_____ 2.
_____ 3.
_____ 4.
_____ 5.
_____ 6.
_____ 7.
_____ 8.
_____ 9.
_____10.
Parking lots
Electricity used by a machine
Excavation costs
Interest on building construction loan
Cost of trial runs for machinery
Drainage costs
Cost to install a machine
Fences
Unpaid (past) property taxes assumed
Cost of tearing down a building when land and a building on it are purchased
Question 3
Identify the following expenditures as capital expenditures (ASSET) or revenue expenditures
(EXPENSES).
(a) Replacement of worn out gears on factory machinery.
(b) Construction of a new wing on an office building.
(c) Painting the exterior of a building.
(d) Oil change on a company truck.
(e) Replacing a computer chip with a larger chip, which increases productive capacity. No
extension of useful life expected.
(f) Overhaul of a truck motor. One year extension in useful life is expected.
(g) Purchased a wastebasket at a cost of RM10.
(h) Painting and lettering of a used truck upon acquisition of the truck.
Question 4
DeLong Corporation purchased land adjacent to its plant to improve access for trucks making
deliveries. Expenditures incurred in purchasing the land were as follows: purchase price,
RM73,000; broker’s fees, RM6,000; title search and other fees, RM5,000; demolition of an old
building on the property, RM5,700; grading, RM1,200; digging foundation for the road,
RM3,000; laying and paving driveway, RM25,000; lighting RM7,500; signs, RM1,500.
Required:
List the items and amounts that should be included in the Land account.
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Question 5
On March 1, 2019, Joyner Company acquired real estate on which it planned to construct a
small office building. The company paid RM65,000 in cash. An old warehouse on the property
was razed at a cost of RM7,600; the residual materials were sold for RM1,700. Additional
expenditures before construction began included RM1,100 attorney's fee for work concerning
the land purchase, RM4,000 real estate broker's fee, RM7,800 architect's fee, and RM14,000 to
put in driveways and a parking lot.
Required:
Determine the amount to be reported as the cost of the land.
Question 6
Kemp Company purchased factory equipment with an invoice price of RM85,000. Other costs
incurred were freight costs, RM1,100; installation wiring and foundation, RM2,200; material and
labor costs in testing equipment, RM700; oil lubricants and supplies to be used with equipment,
RM500; fire insurance policy covering equipment, RM1,400. The equipment is estimated to have
a RM5,000 residual value at the end of its 10-year useful service life.
Required:
Compute the acquisition cost of the equipment. Clearly identify each element of cost.
Question 7
Waner Company exchanged an old machine (cost RM100,000 less RM60,000 accumulated
depreciation) plus RM5,000 cash for a new machine. The old machine had a fair value of
RM36,000.
Required:
Prepare the entry to record the exchange of assets by Waner Company.
Question 8
Fisher Company trades old equipment (cost RM90,000 less RM54,000 accumulated
depreciation) for new equipment. Fisher paid RM36,000 cash in the trade. The old equipment
that was traded had a fair value of RM44,000. The transaction has commercial substance.
Required:
Prepare the entry to record the exchange of assets by Fisher Company.
Question 9
On June 30, 2019, the company exchanged old office equipment and RM40,000 cash for new
office equipment. The old office equipment originally cost RM80,000 and had accumulated
depreciation to the date of disposal of RM35,000. It is estimated that the fair value of the old
office equipment on June 30 was RM50,000. The transaction has commercial substance.
Required:
Prepare the entry to record the exchange of assets.
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Question 10
Sejahtera Company acquired a piece of production equipment on 31 January, 2020, for use in
producing tripod stands. The catalog listed the equipment cost at RM50,000 on the date of
purchase. Sejahtera Company was granted a trade discount of 3%. Other information
pertaining to the equipment is as follows:
1.
The equipment had to be installed with a special attachment. The attachment cost
RM2,400. An additional RM420 was paid to an installer who performed the installation.
2.
Freight costs amounted to RM335 for shipping the equipment to Sejahtera manufacturing
plant.
3.
One of Sejahtera’s employees knocked the equipment against the wall prior to installation
and caused damage to the equipment in the amount of RM200 and damage to the wall in
the amount of RM225.
4.
Sejahtera’s borrowed RM50,000 from the bank to pay for the equipment, with an
agreement to repay the loan at RM10,000 per year beginning 31 January, 2020, plus
accrued interest at 10%.
5.
Sales taxes paid on the equipment are RM2,500.
6.
Employees were provided a one-day training session to learn how to use the equipment.
The training session cost RM600.
Required:
Determine the cost of the equipment for Sejahtera Company.
Question 11:
Robin purchased an item of plant. The details are as follows:
RM
List price
Trade discount
Shipping and handling
Pre-production testing
Maintenance for four years
Site preparation:
Concrete reinforcement
Electrical cabling and wiring
Labour cost
RM
1,200,000
10%
16,000
25,000
60,000
12,000
34,000
36,000
Robin had specified wrong cables and the cost of correcting the error of RM12,000 is included in
the electrical cabling costs. The plant is expected to last for five years, at the end of which
Robin will incur compulsory dismantling costs of RM10,000 and site restoration cost of RM5,000.
The present value of RM1 received in five years’ time is RM0.75, using a discount rate of 6%.
The residual value of the plant is estimated at RM26,000.
Required:
(a)
Calculate the amount that will be recognized as plant.
(b)
Show the extract of the statement of comprehensive income of Robin.
(c)
Show the extract of the statement of financial position at the end of year 1.
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Question 12
On 1 January 2020 Rozabella Bhd. purchased an equipment for RM600,000, including RM50,000
refundable purchase taxes. The entity incurred costs of RM20,000 in transporting the
equipment to the entity’s site and RM100,000 in installing the equipment at the site. At the end
of the equipment’s 10-year useful life the entity is required to dismantle the equipment and
restore the land upon which the factory is build. The present value of the cost of dismantling
the equipment and restoring the environment is estimated to be RM100,000.
In January 2020 the entity’s engineer incurred the following costs in modifying the equipment
so that it can produce the products manufactured by the entity:
 Material – RM55,000
 Labour – RM65,000
 Depreciation of plant and equipment used to perform the modifications – RM15,000
In January 2020 the entity’s production staff were trained in how to operate the new item of
equipment. Training costs included:

Cost of an expert external instructor – RM7,000

Labour – RM3,000
In February 2020 the entity’s production team tested the equipment and the engineering team
made further modifications necessary to get the equipment to function as intended by
management. The following costs were incurred in the testing phase:

Material – RM21,000

Labour – RM11,000

Depreciation of plant and equipment used to perform the modifications – RM5,000
The equipment was only ready for use on 1 March 2020.
Required:
Compute the total cost of the equipment.
Question 13
Perkasa Trading Berhad purchased land as a factory site and contracted Waja Construction
Berhad to construct a factory. Perkasa Trading Berhad made the following expenditures related
to the acquisition of the land, building and machinery to equip the factory:
Purchase price of the land
Demolition and removal of old building
Clearing and grading the land before construction
Stamp duty and legal fees on the purchase of the land
Architect’s fee for the plant for the new building
Payments to Waja Construction for building construction
Machinery purchased
Trade discount for machinery – 5%
Freight charges on machinery
Cost to build special platforms and install wiring for the machinery
Cost of trial runs to ensure proper installation of the machinery
Maintenance charges for machinery for three years
Fire and theft insurance on the factory for the first year of use
General administrative costs
RM
1,200,000
80,000
150,000
42,000
50,000
3,250,000
860,000
32,000
12,000
7,000
10,000
24,000
100,000
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In addition to the above expenditures, Perkasa Trading Berhad purchased four forklifts from
Sumi Engineering Sdn Bhd. In payment, Perkasa Trading Berhad paid RM16,000 cash and
signed a noninterest-bearing note requiring the payment of RM70,000 in one year. An interest
rate of 7% reflects the time value of money for this type of loan.
Required:
Determine the initial cost of each of the property, plant and equipment (i.e. land, building,
machinery and forklifts) Perkasa Trading Berhad acquired in the above transactions.
Question 14
a)
You are working in the accounting department of Rozzalia Bhd, a company that
specializes in the production and sales of products related to roselle. You have been
asked by your supervisor to review several issues related to decisions made on the
financial statement items of the company during the financial year 2019.
The followings are the situations that require your consideration:
i. On 1 January 2019, the company places an order for a machine from a company in
Japan. The delivery of the machine is made on 31 January 2019. The list price of the
machine is RM300,000 with a trade discount of 1% on the initial list price. Import
duties and taxes amounted to RM15,000. The following costs are also incurred in
relation to the purchase :
– Delivery and transport costs from Port Klang to the factory amounted to
RM2,500
– Installation and commissioning costs amounted to RM11,500
– Administrative costs incurred in processing the acquisition amounted to RM5,000
The expected useful life of the machine is 30 years.
ii.
On 1 July 2019, the company purchases a land for RM200,000. The land is to be used
to plant the roselle (Hibiscus sabdariffa), to produce raw material for the production
of the company’s products. To secure the purchase, the company incurs costs of
RM20,000 for the legal fees. It is the company’s practice to restore land used as
plantation area after the end of the expected usage of the land. Thus, at the end of
the land’s 10-year useful life, the company will restore the land for environmental
sustainability. The present value of the cost of land restoration is estimated to be
RM50,000. The company uses straight line depreciation method for all property, plant
and equipment. The company uses cost model for all property, plant and equipment.
Required:
Prepare journal entries for the initial recognition of items 1 and 2 above for Rozzalia Bhd.
(Assume that all the payments are made by cash).
b)
Maram Bhd acquires a production equipment to be used in producing the company’s main
product line, a 4D ultrasound machine. The production equipment is expected to be used
for five years before being scrapped.
Required:
By citing relevant accounting standards, suggest the accounting treatment for the
assets.
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Question 15
Samudera Bhd. started business in early 2020. In the first few months of its operation,
Samudera Bhd. acquired a land for the construction of a building. Operating equipment was
purchased and installed and was ready for use. The company signed a 10 year long term loan
with Bank Abadi Bhd of RM1,000,000. The company used most of the loan to buy land,
equipment and to finance a self-constructed building.
Recently, the company hired a young account executive, Miss Finna, to maintain accounting
records of the company. After a few process of data gathering and analysis of documents, she
has the following list of cost incurred:
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Description
Cost of land purchased as a building site.
Paid architect’s fee for design of new building.
Paid for demolition of old building on building site purchased in (1).
Paid tax on the land purchased as a building site in (1).
Paid excavation cost for the new building.
Made the initial payment to the building contractor.
Received from sale of salvaged materials from demolishing the old building.
Made final payment to the building contractor.
Paid interest on loan used for construction of building.
Medical cost for a worker involved in accident during the construction of
building.
Made payment for the purchase of equipment.
Paid freight on the purchase of equipment.
Paid for the installation of equipment.
Paid for repair of damaged equipment after installation.
Paid for a three-day training session for employees to learn how to use the
equipment.
RM
170,000
23,000
28,000
1,700
15,000
250,000
6,800
350,000
22,000
10,000
40,000
1,900
4,200
2,700
2,500
Required:
a) Determine the cost to be capitalized in accordance with MFRS 116 for the following types of
property, plant and equipment:
i) Land
ii) Building
iii) Equipment
b)
Prepare journal entries for the initial recognition of land, building and equipment above
assuming all payments are made by cash.
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