FINANCIAL ACCOUNTING 2 by PolisasLib3

FINANCIAL ACCOUNTING 2

PREPARED BY Wan Maimunah Binti Wan Ishak Jidarulaila Binti Salleh Hazman Bin Mat

FINANCIAL ACCOUNTING 2

Writer Wan Maimunah Binti Wan Ishak Jidarulaila Binti Salleh Hazman Bin Mat

Designer Jidarulaila Binti Salleh

Hakcipta terpelihara. Tiada bahagian daripada terbitan ini boleh diterbitkan semula, disimpan untuk pengeluaran atau ditukarkan ke dalam sebarang bentuk atau dengan sebarang alat, sama ada dengan cara elektronik, gambar dan rakaman serta sebagainya tanpa kebenaran bertulis daripada pemegang hakcipta.

Diterbitkan oleh: Politeknik Sultan Haji Ahmad Shah Semambu 25350 Kuantan, Pahang

ACKNOWLEDGEMENTS Special thank you to all our authors who have contributed to this book. This book would not have come together without all the efforts and hard work from all the authors. We would also like to extend our gratitude to Head of Department and Head of Programme, Commerce Department and Polisas ELearning Committee for the support and guidance. Thank you all.

Wan Maimunah Binti Wan Ishak Jidarulaila Binti Salleh Hazman Bin Mat

PREFACE The objective of this book is to provide source of information and knowledge especially for students who enrolled for Diploma in Accountancy or any students who may require to refer for any topic relevant to them.

This book entirely based on the Polytechnic MOHE syllabus for Diploma in Accountancy. As Financial Accounting 2 is a core subject, students need to have comprehensive understanding of this subject with the updated knowledge of Malaysian Accounting Standard Board (MASB) and Malaysian Financial Reporting Standards (MFRSs) regulation. This will help them to understand concepts and relevant knowledge of financial accounting. This book will cover all the topics consist of Accounting for Cash and Cash Equivalents, Accounting for Inventories, Accounting for Property, Plant and Equipment, Accounting for Trade Receivables, Accounting for Trade Payables, Provisions & Contingent Liabilities/Assets, Accounting for Revenues & Expenses and Accounting for Partnership.

We welcome any constructive suggestions and comments from lecturers and students. Such feedback is given careful consideration and very helpful for future improvement.

CONTENTS FINANCIAL ACCOUNTING 2 Acknowledgements ........................................................................ i Preface ............................................................................................ ii

ACCOUNTING FOR CASH AND CASH EQUIVALENTS Introduction.................................................................................... 2 Nature of cash and cash equivalents under MFRS 107 (MPERS: Section 7) ......................................................................... 2 Recognize records under cash books ............................................. 3 Bank reconciliation statement ....................................................... 8 Presentation of cash and cash equivalents in Financial Statements ..................................................................... 13 Exercise .......................................................................................... 14

ACCOUNTING FOR INVENTORIES Introduction .................................................................................. 18 Nature of inventory under MFRS 102 (MPERS: Section 13) .......... 18 Recognition and measurement of inventories .............................. 19 Measurement of profit and value of closing inventories .............. 20 Presentation of inventories in financial statements ...................... 29 Exercise .......................................................................................... 30

ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT Introduction .................................................................................. 34 Nature of property, plant and equipment under MFRS 116 MPERS: Section 17) ....................................................................... 34 Recognition and measurement of property, plant and equipment under MFRS 13 and MFRS 116 ................................... 34 De-recognition of property, plant and equipment under MFRS 13 and MFRS 116 ................................................................ 45 Presentation of property, plant and equipment in financial statements under MFRS 116 ........................................................ 56 Exercise ......................................................................................... 59

04 06

ACCOUNTING FOR REVENUES AND EXPENSES Introduction .................................................................... 83 Nature of revenue and expenses .................................... 83 Recognition and measurement of revenues under MFRS 15 (MPERS: Section 23) .............................. 84 Recognition and measurement of expenses .................. 85 Identify the presentation of revenues and expenses in financial statements .................................... 89 Exercise ........................................................................... 91

07 ACCOUNTING FOR PARTNERSHIP Introduction .................................................................... 94 Nature of partnership business according to Partnership Act 1961 ...................................................... 94 Types of accounts for partnership .................................. 97 Accounting treatments on admission new partners and retirement or death of partners ............................... 103 Dissolution of partnership ............................................... 115 Exercise ............................................................................ 122 References ....................................................................... 125

ACCOUNTING FOR TRADE RECEIVABLES Introduction ................................................................................. 63 Nature of trade receivables under MFRS 9, MFRS 132 and MFRS 139 .............................................................................. 63 Recognition and measurement of trade receivables ................... 63 Presentation of trade receivables in financial statements .......... 69 Exercise ........................................................................................ 70

ACCOUNTING FOR TRADE PAYABLES, PROVISIONS AND CONTINGENT LIABILITIES/ ASSETS Introduction ................................................................................ 73 Nature of trade payables, provisions and contingent liabilities/assets under MFRS 132 and MFRS 137/MFRS 17 (MPERS : Section 21 and 22) ....................................................... 73 Recognition and measurement of trade payable under MFRS 139 (MPERS : Section 22) .................................................. 75 Recognition and measurement of provisions, contingent liability and contingent assets under MFRS 137/MFRS 17 (MPERS : Section 21) ................................................................... 76 Presentation of trade payables, provisions, contingent liability and contingent assets in financial statements ................ 80 Exercise ........................................................................................ 81

CHAPTER 1 Accounting for Cash and Cash Equivalents Learning Outcome a. State the nature of cash and cash equivalents under MFRS 107 (MPERS: Section 7). b. Recognize record under cash books. c.

Prepare bank reconciliation statement.

Show the presentation of cash and cash equivalents in financial statements.

CHAPTER 1

1.0 INTRODUCTION Cash and cash equivalents is a line item on the balance sheet, stating the amount of all cash or other assets that are readily convertible into cash. Any items falling within this definition are classified within the current assets category in the balance sheet. Cash and cash equivalents information is sometimes used by analysts in comparison to a company's current liabilities to estimate its ability to pay its bills in the short term. However, Cash and cash equivalents help companies with their working capital needs since these liquid assets are used to pay off current liabilities, which are short-term debts and bills.

1.1

THE NATURE OF CASH AND CASH EQUIVALENTS UNDER MFRS 107 (MPERS: SECTION 7)

MFRS 107 applies to cash and cash equivalents in providing useful information of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. Users require an evaluation of the ability of an entity to generate cash and cash equivalents from operating, investing and financing activities.

The purpose of cash and cash equivalents base on the three main activities: a)

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Such as, Cash receipts from the sale of goods, the rendering of services, royalties, fees, commissions and other revenue.

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Such as, cash payments to acquire property, plant and equipment, intangibles and other long-term assets.

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Such as, cash proceeds from issuing shares or other equity instruments and cash payments to owners to acquire or redeem the entity’s shares.

CHAPTER 1

1.1.1 Definition of cash and cash equivalents. Cash, comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. In other words, cash equivalents are held for the purpose of meeting short-term cash commitments rather

than for investment or other purposes. For an

investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value.

1.2

RECOGNIZE RECORD UNDER CASH BOOKS.

Cash book is a book of prime entry, a part of the double-entry system where the cash and bank accounts brought together.

The cash book is set out so that the:  debit columns for cash and bank are side by side  credit columns for cash and bank are also side by side  This column is used to identify the name of the ledger and account number where the corresponding part of the double entry has been entered.  Using a folio column speeds up the process of finding the opposite entry in the ledgers.

The folio column:  This column is used to identify the name of the ledger and account number where the corresponding part of the double entry has been entered.  Using a folio column speeds up the process of finding the opposite entry in the ledgers.

CHAPTER 1

Date

Details

Folio

Cash

Bank

Date

Details

Folio

Cash

Bank

Cash

Bank

Figure 1 : Two Column Cash Book EXAMPLE 1.0

Complete the two-column cash book for the following: June 1 Balance brought down from last month: cash RM325; bank RM8,640. 2 Paid insurance RM2,000 by cheque. 3 Cash sales RM600. 4 Purchases by cheque RM3,250. 5 Rahim paid us RM4,250 by cheque. 6 Bought stationery RM40, paying by cash. 7 Paid wages by cheque RM1,350. 8 Piah paid us RM600 for goods previously bought on credit. 9 Received RM2,000 owing from Amin. 10 Paid rent RM300 by cash.

SOLUTION Cash book Date

Details

Folio

Cash 325

Bank 8,640

Date

Details

Folio

02/03

Insurance

GL6

2,000

04/03

Purchases

PL2

3,250

01/03

Bal b/d

03/03

Sales

GL1

05/03

Rahim

SL2

4,250

06/03

Stationery

GL4

08/03

Piah

SL3

600

07/03

Wages

GL9

09/03

Amin

SL5

2,000

10/03

Rent

GL3

11/03

Bal c/d

600

925

15,490

40 1,350 300 585

8,890

925

15,490 4

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1.2.1 Discounts Trade discounts, these are discounts given to companies who trade in the same area or for bulk buying. They are not recorded in the double-entry system.

EXAMPLE 1.1

    

Goods normally sell at retail price of RM250 each. The manufacturer sells them to the retailer at a 20% trade discount for buying 10. The discount is recorded on the invoice RM250 × 10 = 2,500 – 20% (RM500) = RM2,000 RM2, 000 is the figure that is used in the double-entry books.

Cash discounts, these are discounts given for early settlement of an invoice. They are given to encourage early payment. These discounts are recorded in the double-entry system as: a) Discounts allowed – discounts given to debtors when they pay their accounts early. b) Discounts received – discounts received by a business from its suppliers when they pay their

accounts quickly. The discount columns in the cash book are memorandum columns. At the end of the period they are totalled and the total is transferred into the discounts allowed account and discounts received account in the general ledger. The three-column cash book 

Discount columns = memorandum columns.



The discount columns are not part of the double-entry system.



These columns are totalled and transferred to the discounts allowed account and discounts received accounts in the general ledger. Format of three-column cash book

CHAPTER 1

Date

Details

Folio

Disc. Allowed

Cash Book Cash

Bank

Date

Details

Folio

Disc. Received

Cash

Bank

EXAMPLE 1.2

Enter the following transactions in the three-column cash book of William Buck. Balance of the cash book and show the discounts accounts in the general ledger. June 1 Balances brought forward: Cash RM230; Bank RM4,560. 2 Cash sales RM450.. 3 The following debtors paid their accounts by cheque each deducting a 5% cash discount: R Jenn RM460, S Benny RM620 and J Hacker RM540. 4 Paid rent by cheque RM700. 5 Paid wages by cheque RM1,300. 6 Paid the following accounts by cheque, in each case deducting a 2% cash discount: F Jepson RM300, D Hudson RM400, E Butler RM600. 7 Transferred RM500 cash to the bank account. 8 Bought stationery RM60, paying cash.

SOLUTION

Date

Details

1/7 2/7 3/7 3/7 3/7 7/7

Balances b/d Sales R Jenn S Benny J Hacker Cash

Cash Book (Debit Column) Discount Folio Allowed GL 1 SL3 SL4 SL8 C

23 31 42 96

Cash

Bank 230 450

500 1,180

4,560 437 589 498 6,084

CHAPTER 1

Cash Book (Credit Column) Date

Details

4/7 5/7 6/7 6/7 6/7 7/7 8/7 9/7

Discount Received

Folio

Rent Wages F Jepson D Hudson E Butler Bank Stationery balance c/d

GL 2 GL3 PL2 PL5 PL6 C GL8

6 8 12

Cash

Bank 700 1,300 294 392 588

500 60 620 1,180

2,810 6,084

Recording in Ledger

9/7

Discounts Allowed RM 96

Cash book

Discounts Received RM 9/7 Cash book

RM 26

1.2.2 Bank overdraft A bank overdraft exists when a business has taken more money out of its bank account than it has deposited. If this has occurred, then the balance b/d will be shown on the credit side of the account. EXAMPLE 1.3

If a business on 1 November has a bank overdraft of RM1,200, and a cash balance of RM330, then the opening balances in the cash book would appear as follows: Cash Book Date 1/11

Details Bal b/d

Folio

Cash 330

Bank

Date 1/11

Details Bal b/d

Folio

Cash

Bank 1,200

CHAPTER 1

1.3 BANK RECONCILIATION STATEMENT Every month, individuals and businesses maintaining a Current Account with a bank statement received from the bank. Upon receiving the bank statement, the focus is normally on the ending balance besides the transactions on whatever deposits and payments made. The business expects the ending balance appearing in the bank statement is the same as the amount in the Cash Book (bank column). Thus, the purpose of Bank Reconciliation is to do necessary adjustments to our records in the cash book and come up with the same ending balance as recorded by the bank. It is an analysis explaining the difference between a business’s book balance of cash and its bank statement balance. The Bank Reconciliation Statement must be prepared monthly to justify amounts reported in the Bank Statement and the Bank account kept by the business.

1.3.1 Bank Statement Bank Statement is normally debited for payments or charges, and credited for receipts by the business. Examples of payments and charges cheques drawn in favor of creditors or suppliers, bank charges, direct debits and standing order/instructions. Examples of receipts: deposits of cash or cheques, dividend, interest on current account and bank GIRO credits or credit transfer.

EXAMPLE 1.4

Poli Bank Shah Alam Statement of Account

Account No. 654321 Date

Particulars

Debit

Date: 30 April 2019 Credit

Balance

April 1

Balance b/f

800.50 Cr

April 3

Cash deposit

7,000.00

7,800.50 Cr

April 4

Transfer from branch

2,500.00

10,300.50 Cr

April 6

Cheque book

April 8

70010

5.00

10,295.50 Cr

550.00

9,745.50 Cr 8

CHAPTER 1

April 10

70011

700.00

9,045.50Cr

April 12

70012

430.00

8,615.50 Cr

April 15

Bank GIRO Credit

April 20

Direct Debit

April 25

Interest

April 28

Bank Charges

645.00

9,260.50 Cr

574.00

8,686.50 Cr 166.70

8,853.20 Cr

10.00

8,843.20 Cr

1.3.2 Cash Book (Bank Column) Cash book or bank account is normally debited with receipts (deposits of cash or cheques). credited with payments (cheques drawn in favour of creditors or suppliers) of the business.

Balance b/d Cash deposit Credit transfer Ilham Co.

Sample of Bank Account RM 800.50 Bank charges 7,000.00 Amin Trading-70010 2,500.00 Kuat Bhd-70011 200.00 Aris-70012 Iwan-70013 Balance c/d 10,500.50

RM 5.00 550.00 700.00 430.00 350.00 8,465.50 10,500.50

1.3.3 Differences Between Bank Statement Balance and Bank Account Balance Three reasons why the balance in bank statement and the balance in the company’s cash book (bank) could be different. The reasons as follows: a) Items recorded in the Bank Account but not recorded by the bank: i. Uncredited lodgement: Or deposits not yet credited. This happens when a business deposits money or cheques but the amount does not appear in the bank statement since the deposits has not yet been processed by the bank; but has already been recorded by the business. 9

CHAPTER 1

ii. Unpresented cheques: Cheques drawn for payment to creditors or others have not been cashed or banked, i.e., when cheques are drawn for payment and sent to creditors, the record in the business books has been made, but for some reasons the creditor is still carrying the cheque around and have not presented it to the bank for clearance. b) Items recorded in the Bank Statement but not recorded by the business: i.

Direct debit: The bank debited the account of the business for payments such as insurance premiums, rates, fees, subscriptions etc.

ii. Standing instructions order: This is quite similar to the direct debit in that the bank will debit the account of the business for payments such as insurance premiums, rates, subscriptions, etc. iii. Bank service charge: This is a fee charged by the bank for operating the account for the business and or issuing the cheque book. iv. Bank GIRO credit or credit transfer: The business account is credited with amount paid by creditor or other organization direct into the business bank account. v. Interest revenue on current account: This interest is credited to the account of the business and is paid by certain bank based on large enough balance of cash in the account. vi. Dishonoured cheques: A cheque, that the bank will not honor upon presentation by the business for clearance. However, the business has already accepted the cheque for the cash book settlement of a debt. c) Errors: i.

Errors made by the bank: A cheque payment by a debtor had been debited to the business account by the bank, or a bank may make an error in recording the amount to be debited or credited.

ii. Errors made by the business: Error in recording the amount to be debited or credited, or transactions are being debited to the cash book instead of being credited.

CHAPTER 1

1.3.4 Preparation of Adjusted Bank/Cash Book Account Step 1 Updating the Bank Account i.

Matching of entries on the bank statement with those in the bank account. This is done by ticking items that appear both in the bank statement and in the bank account.

ii. Items appearing in the bank statement but not in the bank account are transferred to the bank account. iii. There would still be items in the bank account left unticked and they would be treated as either uncredited lodgment (if it is a debit item) or as unpresented cheques (if it is a credit item) and these items would be dealt with in the bank reconciliation statement later on. iv. Any errors relating to the bank account would be dealt with at this stage. v. Complete the necessary double entry and carry down the balance of the bank account.

Step 2 Preparing the Bank Reconciliation Statement i.

Start with balance as per updated bank account balance Bank Reconciliation Statement as at ….. Balance as per updated bank account

xxx

Add: Unpresented cheques

xxx

Less: Uncredited lodgements

(xxx)

Balance as per bank statement

xxxx

ii. Start with balance as per bank statement Bank Reconciliation Statement as at ….. Balance as per updated bank account

xxx

Add: Uncredited lodgements

xxx

Less: Unpresented cheques

(xxx)

Balance as per bank statement

xxxx

CHAPTER 1

Step 3 Treatments of Error, Overdraft and Opening Balance Disagreements The explanation below are meant for bank reconciliation statement that starts with the updated bank account balance: Opening balance disagreements: the normal procedure is to account for the opening difference,

i.e. by matching and ticking against the entries in the previous period’s bank account. ii.

Errors made by the bank: if as a result of the error, the bank balance has been understated, for example, if the bank had wrongly debited the bank statement, subtract the amount, the reverse treatment is necessary if the bank had wrongly credited the bank statement and as a result the bank statement balance had been overstated.

iii. Overdraft: for such cases the uncredited lodgment will be added whilst the unpresented cheques subtracted. EXAMPLE 1.5

Use example 1.4

SOLUTION

Balance b/d Bank Giro Credit Interest

Bank Account RM 8,465.50 Direct Debit 645.00 Bank Charges 166.70 Balance c/d 9,277.20

Bank Reconciliation Statement as at April 2019 Balance as per bank account (updated) Add: Unpresented cheques Less: Uncredited lodgements Balance as per bank statement

RM 574.00 10.00 8,693.20 9,277.20

8,693.20 350.00 9,043.20 (200.00) 8,843.20

CHAPTER 1

1.4

PRESENTATION OF CASH AND CASH EQUIVALENTS IN FINANCIAL STATEMENTS

Cash and cash equivalents

CHAPTER 1

EXERCISE

1. Which of the following is not an internal control activity for cash? a. The number of persons who have access to cash should be limited. b. The functions of record keeping and maintaining custody of cash should be combined. c. Surprise audits of cash on hand should be made occasionally. d. All cash receipts should be recorded promptly.

2. A RM200 petty cash fund has cash of RM32 and receipts of RM172. The journal entry to replenish the account would include a a. debit to Cash for RM168. b. credit to Petty Cash for RM168. c. credit to Cash Over and Short for RM4. d. credit to Cash for RM172.

3. The following information was taken from Hurumi Company cash budget for the month June Beginning cash balance RM69,000 Cash receipts RM93,000 Cash disbursements RM117,000 If the company has a policy of maintaining an end of the month cash balance of RM60,000, the amount the company would have to borrow is a. RM36,000. b. RM15,000. c. RM24,000. d. RM0. 14

CHAPTER 1

4. Which of the following would not be reported on the balance sheet as a cash equivalent? a. Money market fund. b. Commercial paper. c. Treasury bill. d. Restricted cash.

5. If a check correctly written and paid by the bank for RM628 is incorrectly recorded on the company's books for RM682, the appropriate treatment on the bank reconciliation would be to a. add RM54 to the book's balance. b. subtract RM54 from the book's balance. c. deduct RM54 from the bank's balance. d. deduct RM628 from the book's balance.

6. Enter the following transactions in the three-column cash book of Wee Jack. Balance off the cash book and show the discounts accounts in the general ledger. July 1 Balances brought forward: Cash RM230; Bank RM4,560. 2 Cash sales RM450. 3 The following debtors paid their accounts by cheque each deducting a 5% cash discount: Renn RM460, Senny RM620 and Jacker RM540. 4 Paid rent by cheque RM700. 5 Paid wages by cheque RM1,300. 6 We paid the following accounts by cheque, in each case deducting a 2% cash discount: Fepson RM300, Dudson RM400, Eutler RM600. 7 Transferred RM500 cash to the bank account. 8 Bought stationery RM60, paying cash. Required: Prepare Cash Book.

CHAPTER 1

7. The cash book of Amlas showed a balance at the bank of RM570 in hand on 31 January 19X1. At the same date, the bank statement balance of Amlas account was RM446 overdrawn. The difference was accounted for as follows: a)

Cheques for RM1 555 sent to creditors on 30 January were not paid by the bank until 8 February.

Cheques amounting to RM2 520 paid into the bank on 31 January were not credited by the bank until 1 February.

A standing order for a charitable subscription of RM60 had been paid by the bank on 21 January but no entry had been made in the cash book.

A cheque paid by Amlas for rent on 15 January for RM345 had been entered in his cash book as RM354.

Required: Prepare the bank reconciliation statement.

CHAPTER 2 Accounting for Inventories Learning Outcome a. State the nature of inventory under MFRS 102 (MPERS: Section 13). b. Discuss the recognition and measurement of inventories. c. Compute the measurement of profit and value of closing inventories. d. Show the presentation of inventories in financial statements.

CHAPTER 2

2.0

INTRODUCTION

The accounting for inventory involves determining the correct unit counts comprising ending inventory, and then assigning a value to those units. The resulting costs are then used to record an ending inventory value, as well as to calculate the cost of goods sold for the reporting period. The raw materials, work in progress and finished goods are the example of inventories in the business.

2.1

NATURE OF INVENTORY UNDER MFRS 102 (MPERS SECTION 13)

MFRS102 applies to companies holding inventories in their course of business. These inventories came from transactions which involving the business and the supplier. It can be transacted either by cash, cheque or on credit.

2.1.1 Definition of Inventories Inventories are defined as assets which: a) Held for sale in the ordinary course of business; b) In the process of production for such sale; or c) In the form of materials or supplies to be consumed in the production process or in the rendering

of services. Inventories are classified as current assets in the financial statements when: a) It expects to realize the asset, or intends to sell or consume it in its normal operating cycle. b) It holds the asset primarily for the purpose of trading. c) It expects to realize it within twelve months after the reporting period.

An example of an entity purchases flour for its biscuit factory. The flour is raw material purchased by the entity and used in the production of biscuit in the factory. The raw material is an inventory at current assets in the financial statements because it expects to sell the biscuits in its normal operating cycle within twelve months after the reporting period. 18

CHAPTER 2

2.2 RECOGNITION AND MEASUREMENT OF INVENTORIES Cost of the inventory includes all costs incurred to bring the inventory to its present location and condition. It will include all costs of purchase, conversion costs and all other costs. The following costs should be included as inventories costs: a) Invoice cost b) Shipping c) Cash discounts d) Purchases allowances

Inventories should be measured at the lower of cost and net realisable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See MFRS 13 Fair Value Measurement)

EXAMPLE 2.1

An entity purchases 200 units of finished goods from supplier costing of RM3, 000 for resale to its customers. The net realizable value of the inventories is RM3, 200. SOLUTION The finished goods are inventories because they are purchased for the purpose of trading and the inventory RM3,000 is measured at cost. The cost of inventories would be: Dr

Inventories/ Purchase Account RM3,000 Cr

Bank Account

RM3,000

CHAPTER 2

2.3 MEASUREMENT OF PROFIT AND VALUE OF CLOSING INVENTORIES Ending inventory is the total unit quantity of inventory in stock or its total valuation at the end of an accounting period. The ending inventory figure is needed to derive the cost of goods sold, as well as the ending inventory balance to include in a company's balance sheet. You may be unable to count the amount of inventory on hand at the end of an accounting period, or cannot assign a value to it. This situation can arise when there is too much shipping activity at month-end to conduct a physical count, or because the counting process is too labor-intensive, or when the staff is too busy to take the time to conduct a physical count.

To evaluate the cost of ending inventories there are three methods can be use. Which is: a) First In First Out (FIFO) Assumes that items of inventory purchased or produced first are sold first. Items remaining in inventory are those most recently purchased/produced.

b) Last In First Out (LIFO) Assumes that items of inventory purchased/produced last are sold first. Items remaining in inventory are those most lastly purchased/produced.

c) Average Cost (AVCO) The cost of each items determined from the cost of similar items purchased during the period. Maybe a weighted average or a moving average.

CHAPTER 2

2.3.1 Inventory Evaluation System There are two inventories system commonly used in estimating the ending inventory. The flows can be described as flowchart below: Inventory Evaluation

Perpatual System

Periodic System

FIFO

LIFO

AVCO

FIFO

LIFO

AVCO

2.3.2 Periodic System Inventory will always be evaluate from time to time and recorded in stock cards. Inventory value can be determined at any time because this card records the movements of inventory all the time without having to wait for the accounting period to end. Perpatual system can improved the ability of mass merchandisers to maintain perpetual systems because the company knows the cost of sales and ending inventory figure from their books perpatualy.

CHAPTER 2

EXAMPLE 2.2

1 December 2019 Opening balance is 10 units@ RM3.60 each Date Dec 2 6 10 11 14 19 20 22 23 24 25 29

Purchase 12 @ RM3.50

Sales 10 @ RM6.00

11 @ RM2.50 7 @ RM 4.50 19 @ RM7.50 14 @ RM3.90 7 @ RM4.60 9 @ RM8.20 12 @ RM9.00 11 @ RM3.50 6 @ RM3.30 8 @ RM8.90

Using the periodic system, show the differences in ending inventory value using: a) First In First Out (FIFO) b) Weighted Average (AVCO) Next, state the profit or loss for two methods above.

SOLUTION a) Periodic System – FIFO The steps to be follow: 1) Find the ending inventory (units) = Beginning inventory (units) + Purchase (units) - Sales (units) = 10 + (12+11+7+14+7+11+6) - (10+19+9+12+8) = 10+68-58 = 20 units

CHAPTER 2

2) Calculate cost of ending inventory * In FIFO, the initial (old) inventory will be sold first compared to the newly bought inventory. = (6@RM3.30) + (11@RM3.50) + (3@RM4.60) = RM19.80 + RM14.00 = RM19.80 + RM38.50 + RM 13.80 = RM 72.10 3) Determine gross profit Sales = (10@RM6.00) + (19@RM7.50) + (9 @ RM8.20) + (12 @ RM9.00) + (8 @ RM8.90) = RM60.00 + RM142.50 + RM73.80 + RM 108 + RM71.2 = RM455.50 Cost of goods sold = Beginning Inventory + Purchase – Ending Inventory = (10@RM3.60) + [(12 @ RM3.50) + (11 @ RM2.50) + (7 @ RM 4.50) + (14 @ RM3.90) + (7 @ RM4.60) + (11 @ RM3.50) + (6 @ RM3.30)] - RM 72.10 =RM36.00 + [RM42.00 + RM27.50 + RM31.50 + RM54.60 + RM32.20 + RM38.50 + RM19.80] – RM72.10 = RM210.00 Gross Profit

= Sales – Cost of goods sold = RM455.50- RM210.00 = RM245.50

b) Periodic System – AVCO The steps to be follow: 1) Calculate cost per unit of inventory * In AVCO, the cost per unit will be average for initial (old) inventory, purchase and ended inventory. Cost per unit = = = =

Beginning Inventory (RM) + Purchase (RM) Beginning Inventory (units) + Purchase (units) (10@RM3.60) + [(12 @ RM3.50) + (11 @ RM2.50) + (7 @ RM 4.50) + (14 @ RM3.90) + (7 @ RM4.60) + (11 @ RM3.50) + (6 @ RM3.30)] 10 + [12 + 11 + 7 + 14 + 7 + 11 +6)] RM282.10 78 units RM3.62 per unit 23

CHAPTER 2

2) Find the ending inventory (units) = Beginning inventory (units) +Purchase (units) - Sales (units) = 10 + (12+11+7+14+7+11+6) - (10+19+9+12+8) = 10+68-58 = 20 units 3) Calculate cost of ending inventory (RM) = 20 units x RM3.62 = RM72.40 4) Determine gross profit Sales = (10@RM6.00) + (19@RM7.50) + (9 @ RM8.20) + (12 @ RM9.00) + (8 @ RM8.90) = RM60.00 + RM142.50 + RM73.80 + RM 108 + RM71.2 = RM455.50 Cost of goods sold = Beginning Inventory + Purchase – Ending Inventory = 10 + (12+11+7+14+7+11+6) - 20 = 58 units = 58 x RM3.62 = RM 209.96 Gross Profit

= Sales – Cost of goods sold = RM455.50- RM209.96 = RM245.54

2.3.3 Perpetual System Inventory is evaluate based on total sales and purchase for certain period such as after six month or a year according to accounting period. Inventory quantity and value will be determined through physical calculation at the end of the period and inventory value cannot be determined before the period ends. The system can reduces record keeping but also decreases the ability to track theft, breakage, etc., and prepare interim financial statements.

CHAPTER 2 EXAMPLE 2.3

Use Example 2.2, by perpetual system, show the differences in ending inventory value using a) First In First Out (FIFO) b) Weighted Average (AVCO) Next, state the profit or loss for two methods above. SOLUTION a) Perpetual System – FIFO Date Dec 1 2

COGS 12 @ RM3.40

6 10

10 @ RM2.50

8 @ RM4.45

14 19

Sales

18 @ RM3.90

10 @ RM3.50 Sold=10

12 @ RM3.40 7 @ RM2.50

5 @ RM5.60

3 @ RM2.50 6 @ RM4.45

2 @ RM4.45 9 @ RM3.90

10 @ RM3.48

4 @ RM3.35

Balance 10 @ RM3.50 10 @ RM3.50 12 @ RM3.40 12 @ RM3.40 12 @ RM3.40 10 @ RM2.50 12 @ RM3.40 10 @ RM2.50 8 @ RM4.45 3 @ RM2.50 8 @ RM4.45 3 @ RM2.50 8 @ RM4.45 18 @ RM3.90

1 2

1 2 3

3 @ RM2.50 8 @ RM4.45 18 @ RM3.90 5 @ RM5.60 2 @ RM4.45 18 @ RM3.90 5 @ RM5.60 9 @ RM3.90 5 @ RM5.60 9 @ RM3.90 5 @ RM5.60 10 @ RM3.48 9 @ RM3.90 5 @ RM5.60 10 @ RM3.48 4 @ RM3.35 25

CHAPTER 2

Date

COGS

Sales 8 @ RM3.90

RM247.80

RM202.70

Ending Inventories COGS Sales Profit

= = =

Balance 1 @ RM3.90 5 @ RM5.60 10 @ RM3.48 4 @ RM3.35 RM80.10

RM80.10 RM202.70 RM455.50

Sales – COGS RM455.50 – RM202.70 RM252.80

b) Perpetual System – AVCO Date Dec 1 2 6 10 11 14 19 20 22 23 24 25 29

COGS

Sales

12 @ RM3.40 10 @ RM2.50 8 @ RM4.45 18 @ RM3.90 5 @ RM5.60 10 @ RM3.48 4 @ RM3.35 RM247.80

10 @ RM3.45 19 @ RM3.40 9 @ RM3.99 11 @ RM3.99 8 @ RM3.72 RM208.66

Balance 10 @ RM3.50 22 @ RM3.45 12 @ RM3.45 22 @ RM3.02 30 @ RM3.40 11@ RM3.40 29@ RM3.71 34@ RM3.99 25 @ RM3.99 14 @ RM3.99 24 @ RM3.78 28 @ RM3.72 20 @ RM3.72 RM74.40

Cost per unit

Cost per unit = Total inv (RM) Total inv (units) = (10x 3.50)+(12x3.40) 10+12 = RM3.45/unit Ending Inventories COGS Sales

= = =

RM74.40 RM208.66 RM455.50 26

CHAPTER 2

Profit

= = =

Sales – COGS RM455.50 – RM208.60 RM246.90

2.3.4 Stock Value Cost vs. Net Realizable Value (NRV) •

Inventory is valued at the lower cost between cost price and NRV, which means an inventory should be value at either the cost price or NRV.

•

NRV – MFRS 102 Is the estimated selling price less the estimated cost of completion and the estimated cost necessary to make sale KEY POINT NRV = SALES PRICE – INVENTORY COMPLETION COST

EXAMPLE 2.4

Syarikat Indah, list details of their inventory as follows: ITEM A B C D

COST (RM) 900 550 1,000 1,200

NRV (RM) 810 600 930 1,100

SALES PRICE (RM) 1,500 900 1,400 1,600

Calculate the ending inventory for all items.

SOLUTION ITEM

COST (RM)

NRV (RM)

SALES PRICE (RM)

Lowest Value

900

810

1,500

810

550

600

900

550

1,000

930

1,400

930

1,200

1,100

1,600

1,100

Ending inventory

= 810 + 550 + 930 + 1,100 = RM3,390 27

CHAPTER 2

Method under NRV Three (3) methods to determine ending inventory under NRV a) Item b) Category c) Aggregate

EXAMPLE 2.5

The inventory data below were extracted from Syarikat Mummy on 31 December 2019. Calculate the ending inventory value at the same date by item, category and aggregate. Product Radio Panasonic Elba Air Condition Panasonic Hitachi

Cost (RM) 510 2,250 400 850

NRV (RM) 600 1,980 450 815

SOLUTION

PRODUCT

Radio

Air Condition

Panasonic

COST (RM)

NRV (RM)

METHOD OF EVALUATION (COST VS. NRV) ITEM

510

600

Elba

2,250

1,980

Total (RM)

2,760

2,580

Panasonic

400

450

400

Hitachi

850

815

1,250

1,265

4,010

3,845

Total (RM) Total Inventory Value (RM)

CATEGORY

AGGREGATE

510 1,980 2,580

1,250 3,845 3,705

3,830

3,845 28

CHAPTER 2

We can conclude that if: 1. the company used the item method, ending inventory value is RM3,705 2. the company used the category method, ending inventory value is RM3,830 3. the company used the aggregate method, ending inventory value is RM3,845

2.4 PRESENTATION OF INVENTORIES IN FINANCIAL STATEMENTS Financial statement disclosures provide information regarding the accounting policies adopted in measuring inventories, the principal uncertainties regarding the use of estimates related to inventories, and details of the inventory carrying amounts and costs. This information can greatly assist analysts in their evaluation of a company’s inventory management. Inventory also is an asset and its ending balance is reported in the current asset section of a company's in the statement of financial position. Inventory is not an income statement account. However, the change in inventory is a component in the calculation of the Cost of Goods Sold, which is often presented on a company's income statement. Under MFRS 102, the following matters must be disclosed as part of financial statement reporting relating to inventory accounting. a) Accounting policy for inventories b) Carrying amount, generally classified as merchandise, supplies, materials, work-in-progress and finished goods, as appropriate c) Carrying amount of any inventories carried at fair value less costs to sell d) Amount of any write down of inventories recognized as an expense in the period e) Amount of any reversal of a write down to NRV and the circumstances that led f) to such a reversal g) Carrying amount of inventories pledged as security for liabilities, and h) Cost of inventories recognized as expense (cost of goods sold) 29

CHAPTER 2

EXERCISE

In a perpetual inventory system, a. LIFO cost of goods sold will be the same as in a periodic inventory system. b. average costs are based entirely on unit cost simple averages. c. a new average is computed under the average cost method after each sale. d. FIFO cost of goods sold will be the same as in a periodic inventory system.

Company Man has the following inventory data: August 1 8 17 25 30

Beginning inventory Purchases Sale Purchases Sale

20 units at RM10 130 units at RM15 80 units 30 units at RM20 60 units

Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average cost method for August? (DO NOT ROUND INTERMEDIATE CALCULATIONS). a. RM641.33 b. RM611.11 c. RM800.00 d. RM500.00 3.

Simpon Co. purchased inventory as follows: Jan.

5 500 units at RM10.00 15 1,000 units at RM15.00 25 200 units at RM20.00

What is the average unit cost of inventory? a. RM14.12 b. RM15.00 c. RM13.00 d. RM15.83

CHAPTER 2

Deli Cakes has the following inventory data: Nov 1 8 17 25

Inventory Purchase Purchase Purchase

30 units @ RM6.00 each 120 units @ RM6.45 each 60 units @ RM6.30 each 90 units @ RM6.60 each

A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO periodic inventory system is a. RM657 b. RM632 c. RM1, 269 d. RM1, 295 5.

Baker Company just began business and made the following four inventory purchases in June: Date June 1 10 15 28

Unit 150 200 200 150

RM 1,040 1,560 1,680 1,320 5,600

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO periodic inventory method, the amount allocated to ending inventory for June is: a. RM1,456 b. RM1,508 c. RM1,824 d. RM1,848

CHAPTER 2

Razif commenced a business on 1st September 2018 as a computer part supplier in Kuantan. Below are the movements of stocks in October 2018: Stocks on 30 September 2014 was 25 units@RM189.00 Date October 3 5 8 10 15 19 20 22 28 29

Purchase 40 units @RM190.00 30 units @RM200.00 50 units @RM220.00 20 units @RM220.00 30 units @RM230.00

Sales 45 units 30 units 50 units 20 units 40 units

The sales price is based on the quantities below: Less than 30 units = RM250 (normal price) 30 units to 49 units = 5% discount from the normal price 50 units and above = 10% discount from the normal price Required: a) Calculate the ending stock and gross profit as at 31st October 2014 by using Average Cost (AVCO) method if Razif use perpetual system. b) Calculate the ending stock and gross profit using Last in First out (LIFO) method if Razif use periodic system.

CHAPTER 3 Accounting for Property, Plant and Equipment Learning Outcome a. State the nature of property, plant and equipment under MFRS 116 (MPERS: Section 17) b. Provide the discussion on the recognition and measurement of property, plant and equipment under MFRS 13 and MFRS 116 c. Provide the discussion on the de-recognition of property, plant and equipment under MFRS 13 and MFRS 116 d. Show the presentation of property, plant and equipment in Financial Statements under MFRS 116

CHAPTER 3

3.0

INTRODUCTION

Property, plant, and equipment (PP&E) are also called fixed assets, meaning they are physical assets that a company cannot easily liquidate. PP&E fall under the category of non-current assets, which are the long-term investments or assets of a company. Non-current assets like PP&E have a useful life of more than one year. Property, plant and equipment is recorded on a company's financial statements, specifically on the balance sheet. Property, plant and equipment is initially measured according to its historical cost, which is the actual purchase cost and the costs associated with bringing assets to its intended use.

3.1

NATURE OF PROPERTY, PLANT AND EQUIPMENT UNDER MFRS 116 (MPERS: SECTION 17)

Property, plant and equipment is a non-current, tangible capital asset shown on the balance sheet of a business and is used to generate revenues and profits. 3.1.1 Definition and Category of Property, Plant and Equipment According to MFRS 116, property, plant and equipment are tangible items that are: a) Held for use in the production or supply of goods or services. b) For rental to others, or for administration purposes c) Expected to be used for more than one period.

3.2

RECOGNITION AND MEASUREMENT OF PROPERTY, PLANT AND EQUIPMENT UNDER MFRS 13 AND MFRS 116

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred.

CHAPTER 3

3.2.1 Initial Recognition of Plant, Property and Equipment According to MFRS 116, plant, property and equipment are recognize an asset when: a) That future economic benefits associated with the item will flow to the entity. -

The purpose to acquire property, plant and equipment usually generates income directly.

Example: Using machine to manufacture goods for sales or indirectly an entity’s computer equipment used by the administrative staff from their use. b) The cost of the item can be measured reliably. -

The cost of an item property, plant and equipment can be measure precisely.

Example: Acquired a new furniture for office used. The furniture was paid in cash for RM52,000 on delivery. The value of the item can be measured reliably because the equipment is exchanged for a cash payment of RM52,000, which was paid at the time the entity received the equipment. Items such as spare parts, stand-by equipment and servicing equipment are recognized in accordance with this section when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. If the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. 3.2.2 Initial Measurements of Property, Plant and Equipment According to MFRS 116, property, plant and equipment is initially measure at its cost include: a) The purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. b) The initial estimate of costs for dismantling and removing the items and restoring the site on which it is located. c) Any cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner as intended by the management.

CHAPTER 3

Examples of directly attributable costs are: a) Costs of employee benefits (as defined in MFRS 119 Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment b) Costs of site preparation; c) Initial delivery and handling costs; d) Installation and assembly costs; e) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and f) Professional fees

EXAMPLE 3.1

On 1 Jun 2019, Flexiss Sdn Bhd purchased a machine and spends the following cost: Item Purchase cost Other administration cost to purchase this machine Cost of initial delivery Site preparation cost Cost of installation and assembly

RM 50,000 500 500 1,000 2,500

Calculate the cost of machine.

SOLUTION Item Purchase cost Cost of initial delivery Site preparation cost Cost of installation and assembly Cost of machine Journal entries: Dr Machine Cr Bank

RM 50,000 500 1,000 2,500 54,000 RM54,000 RM54,000 36

CHAPTER 3

3.2.3 Subsequent Costs to be Capitalized or Written Off Additional costs that relate to services and maintenance are treated as expenses in the statement of profit or loss. Costs which relate to additions and improvements that meet the asset recognition criteria are capitalized as assets. Therefore, subsequent costs are capitalized as an asset when this cost can be measure reliably and it is probable that obtain future economic benefit. Future economic benefit includes: a) Increase useful life b) Increase in quality of product c) Increase in quantity of product produced d) Decrease in operational cost Parts of some items of property, plant and equipment may require replacement at regular intervals (for example, the roof of a building). The cost of replacing the item will increase the carrying amount of the property, plant and equipment if the replacement parts is expected to provide additional benefits in the future. Costs of the day-to-day servicing of the item does not recognise in the carrying amount of an item of property, plant and equipment and must be recognise in profit or loss. A condition of continuing to operate an item of property, plant and equipment (for example, an aircraft) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment. The carrying amount is the value of an asset as reflected in a company’s book or balance sheet, minus the depreciation value of the asset. It is also called as a book value.

CHAPTER 3

EXAMPLE 3.2

Glow Ent. own lorry which was acquire two years ago. The carrying value of the vehicle RM240,000. For the current year the following expenditure were incurred: Item Road tax and insurance Petrol Rustproof treatment that will extend the lifespan of the car for several years Painting business name and logo

RM 3,600 200 3,500 1,000

Calculate total carrying amount.

SOLUTION Road tax and insurance, petrol and painting business name and logo total RM4,800 written off as expenses in the statement of comprehensive income. Rustproof treatment RM3,500 capitalized and added to the carrying amount of the lorry. Total carrying amount for vehicle are RM243,500 (RM240,000 + RM3,500).

3.2.4 Subsequent Measurement Based on Cost Model and Revaluation Model Property, plant and equipment are measured using cost model or revaluation model as its accounting policy and the policy should be applied to an entire class of property, plant and equipment. a) Cost Model All items of property, plant and equipment shell measured after initial recognition at cost less any accumulated depreciation and any accumulated impairment losses. The fair value of property, plant and equipment is not taken into consideration.

CHAPTER 3

b) Revaluation Model Property, plant and equipment are carried at a revalue amount (if the fair value can be measured reliably) less any subsequent accumulated depreciation and subsequent accumulated impairment loss. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Adoption of revaluation model will produce more relevant information for capital providers in making useful decision.

EXAMPLE 3.3

Mezz Sdn. Bhd. acquired a freehold land on 1 January 2019 for RM1,000,000. On 31 December 2019, the fair value of the land was RM1,750,000. Show the carrying amount of the land as at 31 December 2019 if the company use policy: a) Cost model b) Revaluation model SOLUTION a) Cost model The carrying amount is the cost of the land which is RM1,000,000. b) Revaluation model The carrying amount is the fair value of the land which is RM1,750,000. 3.2.5 Depreciation, Depreciable Amount, Residual Value and Useful Life Depreciation commences when the asset is made available for use and to continue depreciating till de-recognition, depreciating even during idle period. Depreciation charge is determined separately for each significant part of an item of property, plant and equipment. Table 3.1 show the differences in terms used: 39

CHAPTER 3

Item

Description

Depreciation

Systematic allocation of the depreciable amount of an asset over its useful life (MFRS 116).

Depreciable

The cost of an asset, or other amount substituted for cost less its residual

Amount

value.

Residual Value

The estimated amount that would currently obtain from disposal of the asset, after deducting the estimated costs of disposal. If the asset was already of the age and in the condition expected at the end of its useful life.

Useful Life

Period over which an asset is expected to be available for use or the number of production or similar unit expected to be obtained from the asset. Figure 3.1: Depreciation, Depreciable Amount, Residual Value and Useful Life

EXAMPLE 3.4

On 1 March 2019, a motor vehicle was bought at RM180,000 by cheque. Total depreciation until 31 December 2019 is RM15,000, show the journal entries for this transaction.

SOLUTION Journal entries: Dr

Motor vehicle Cr Bank

RM180,000

Depreciation RM15,000 Cr Accumulated Depreciation

RM180,000 RM15,000

CHAPTER 3

3.2.6 Methods of Depreciation A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method and reducing balance method. Straight Line Method Straight Line method is a very common, and the simplest method of calculating depreciation expense. In this method, the depreciation expense amount is the same every year over the useful life of the asset. KEY POINT Depreciation Expense = (Cost – Residual value) / Useful life or Depreciation Expense = Cost of asset x Rate of depreciation

EXAMPLE 3.5

An equipment at cost RM25,000 with an estimated useful life of 8 years and a RM2,000 residual value. Calculate the depreciation expense per year for this equipment.

SOLUTION Depreciation = = =

Cost – Residual Value Useful Life 25,000 – 2,000 8 years RM2,875 per annum

CHAPTER 3

Year

Depreciation Expenses Accumulated Depreciation (RM) (RM) 1 2,875 2,875 2 2,875 5,750 3 2,875 8,625 4 2,875 11,500 5 2,875 14,375 6 2,875 17,250 7 2,875 20,125 8 2,875 23,000 Figure 3.2: Depreciation expenses and accumulated depreciation by straight line method Journal entries for Year 1 to Year 8: Dr Depreciation Cr Accumulated Depreciation

RM2,875 RM2,875

EXAMPLE 3.6

A machine at cost RM500,000 is depreciate at 10% per annum. Show the depreciation for 5 years.

SOLUTION Depreciation = =

500,000 x 10% RM50,000 per annum

Year

Depreciation Expenses (RM)

Accumulated Depreciation (RM)

50,000

100,000

50,000

150,000

50,000

200,000

50,000

250,000

Figure 3.3: Depreciation expenses and accumulated depreciation at 10% per annum Journal entries for Year 1 to Year 5: Dr Depreciation Cr Accumulated Depreciation

RM50,000 RM50,000 42

CHAPTER 3

EXAMPLE 3.7

The information below is extract from the book of Emma Sdn. Bhd. On 1 January 2019. Buildings Accumulated depreciation Book Value

RM650,000 RM200,000 RM450,000

The company policy is to depreciate at rate 15% per annum using straight line method. Show the accumulated depreciation account for year ended 31 December 2019.

SOLUTION Depreciation = =

650,000 x 15% RM97,500 per annum Accumulated Depreciation Account

Balance c/d

RM 297,500 297,500

Balance b/d Depreciation

RM 200,000 97,500 297,500

Reducing Balance Method A fixed percentage is discharged in each accounting period to the net balance of the fixed asset (book value). Thus, the rate percent is not calculated on cost of asset but on the book value of asset, which in turn is calculated by subtracting depreciation from its cost. KEY POINT Depreciation Expense = (Cost – Accumulated Depreciation) x Rate of depreciation or Depreciation Expense = Book Value x Rate of depreciation

CHAPTER 3

EXAMPLE 3.8

A company buy a van for RM155,000. It is depreciate at 20% of its value each year. Calculate the first four years of depreciation using the reducing balance method and accumulated depreciation account.

SOLUTION Year

Book Value x 20% (155,000 – 0) 20%

Depreciation Expenses (RM) 31,000

Accumulated Depreciation (RM) 31,000

1 2

(155,000 – 31,000) 20%

24,800

55,800

(155,000 – 55,800) 20%

19,840

75,640

(155,000 – 75,640) 20%

15,872

91,512

Figure 3.4: Depreciation expenses and accumulated depreciation by reducing balance method Accumulated Depreciation Account Y1

Balance c/d

RM 31,000 31,000 55,800

Y3 Y4

Depreciation

Balance c/d

55,800 75,640

Balance b/d Depreciation

Balance c/d

75,640 91,512

Balance b/d Depreciation

91,512

RM 31,000 31,000 31,000 24,800 55,800 55,800 19,840 75,640 75,640 15,872 91,512

CHAPTER 3

EXAMPLE 3.9

The following information at Jovein Sdn. Bhd. on 1 January 2019. Machinery RM820,600 -) Accumulated Depreciation RM310,000 Book Value RM510,600 All machine are depreciate at the rate 20% annually. Show the accumulated depreciation account for the year ended 31 December 2019. SOLUTION Depreciation Expense = = =

(Cost – Accumulated Depreciation) x Rate of depreciation 510,600 x 20% RM102,120 Accumulated Depreciation Account

Balance c/d

RM 412,120 412,120

3.3

Balance b/d Depreciation

RM 310,000 102,120 412,120

DE-RECOGNITION OF PROPERTY, PLANT AND EQUIPMENT MFRS 13 AND MFRS 116

An item of property, plant and equipment is derecognised when it is disposed of or when no future economic benefits are expected from its use. 3.3.1 Disposal, Gain or Loss on Disposal and Revaluation When asset is disposed, it should be removed (derecognised) from the statement of financial position. The gain or losses arising from de-recognition of an item of property, plant and equipment shall be included in income statement but not treated as revenue. Gain or loss on disposal is the difference

CHAPTER 3

between the proceeds received on selling the asset and its carrying amount. Received from selling amount or price that would be received to sell an asset also known as a fair value (MFRS 16). 3.3.2 Gain or Loss on Disposal a) Gain on Disposal of a Fixed Asset When a fixed asset is sold for an amount higher its carrying amount at the date of disposal, the excess is recognized as gain on disposal. KEY POINT

Gain/Profit = Sales Price exceed Carrying Amount/ Book Value

b) Loss on Disposal of a Fixed Asset If a fixed asset is sold at a price lower than its carrying amount at the date of disposal, a loss is recognized equal to the excess of carrying amount over the sale proceeds. KEY POINT

Loss = Sales Price less than Carrying Amount/ Book Value

CHAPTER 3

The accounting for disposal of fixed assets can be summarized as follows:

Remove the asset from the account asset Dr Disposal Account xx Cr Fixed Asset

Remove accumulated depreciation for disposable asset Dr Accumulated Depreciation xx Cr Disposal Account xx

Record cash receive or the receivable created from the sale Dr Cash/Bank xx Cr Disposal Account xx

Recognize the resulting gain or loss Dr Disposal Account xx Cr Income Statement (Gain)

Or Dr Cr

Income Statement (Loss) Disposal Account

EXAMPLE 3.10

On January 2017, Company b purchased equipment at a cost of RM2,000,000. The company depreciate the asset on a straight-line method by monthly basis at 10% per annum and was sold at RM500,000 on 31 December 2019. Accumulated depreciation until date of sales are: a) RM1,800,000 b) RM1,400,000

CHAPTER 3

SOLUTION a) Gain/ (loss) = Sales - Carrying Amount/ Book Value = RM500,000 – (2,000,000 – 1,800,000) = RM300,000 Journal entries: Dr

Bank

RM500,000

Accumulated Depreciation Cr

RM1,800,000

Equipment

RM2,000,000

SOCI (gain from disposal)

RM300,000

b) Gain/ (loss) = Sales - Carrying Amount/ Book Value = RM500,000 – (2,000,000 – 1,400,000) = (RM100,000) Journal entries: Dr

Bank

RM500,000

Accumulated Depreciation SOCI (loss from disposal) Cr

Equipment

RM1,400,000 RM100,000 RM2,000,000

CHAPTER 3

EXAMPLE 3.11

The following is an extract of Statement of Financial Position for Al-Meerah Sdn Bhd as at 1st January 2019. Cost

Accumulated Depreciation

Vehicle

RM76,000

RM30,400

Office Equipment

RM25,400

RM4,800

The following transactions are occurred for the year 2019: 1 January

Purchase a new office equipment by cash RM5,600

30 April

Sold a vehicle A purchased on 1st January 2015 at cost RM28,000 and fair value RM16,000.

30 June

Sold office equipment for RM11,000 which is bought on 1 July 2016 at cost RM19,000.

It is the business policy by monthly basis. Depreciation for vehicle 10% per year by straight line method and office equipment 5% per year by reducing balance method You are required to prepare: a) Calculation of depreciation for assets b) Assets Account c) Accumulated Depreciation Accounts Disposal of Assets Account

CHAPTER 3

SOLUTION a) Calculation of depreciation for assets Vehicle Vehicle A RM28,000 2,800 2,800 2,800 2,800 2,800 x 4/12 = 933 12,133 (dispose)

Year 2015 2016 2017 2018 2019

Balance RM48,000

4,800

SOCI 2,800 2,800 2,800 2,800 5,733

Office equipment Old O/Equipment RM19,000

Year 2016

950 x 6/12 = 475

2017

18,525 x 5% = 926

2018

17,569 x 5% = 874

2019

16,695 x 5% x 6/12 = 417

New O/Equipment RM5,600

280

2,692 (dispose)

Balance RM6,400

SOCI (RM)

Acc. Depreciation = 4,800 – 2,275 = 2,525

475

Depreciation = (6,400-2,525) 5% = 194

874

926

891

b) Asset Account Vehicle Account Balance b/d

RM 76,000 76,000

Disposal Balance c/d

RM 28,000 48,000 76,000

CHAPTER 3

Office Equipment Account RM 25,400 5,600 31,000

Balance b/d Cash

Disposal Balance c/d

RM 19,000 12,000 31,000

c) Accumulated Depreciation Accounts Accumulated Depreciation Account - Vehicle Disposal Balance c/d

RM 12,133 24,000 36,133

Balance b/d SOCI

RM 30,400 5,733 36,133

Accumulated Depreciation Account – Office Equipment Disposal Balance c/d

RM 2,692 2,999 5,691

Balance b/d SOCI

RM 4,800 891 5,691

d) Disposal of Assets Account Disposal Account – Vehicle Vehicle SOCI (Gain)

RM 28,000 133 28,133

Acc. Dep Cash

RM 12,133 16,000 28,133

Disposal Account – Office Equipment Off. Equipment

RM 19,000 19,000

Acc. Dep Cash SOCI (Loss)

RM 2,692 11,000 5,308 19,000

CHAPTER 3

Asset Exchange It is also possible for companies to exchange an existing asset for a new asset. For instance, an existing old machine exchanged for a new machine. This is also known as trade in transaction. The disposal value of the asset will be the trade in value. The exchange asset may be at a loss (exchange value is less than the book value) or gain (exchange value exceeds the book value) to the entity. Any difference between the value of old asset and new asset is settled by the payment or receiving of cash.

EXAMPLE 3.12

The old machinery was exchanged with a new one on 1 January 2019. The new machine cost is RM120,000. The supplier of the new machine has accepted RM42,000 for the old machine as trade in value. The remaining amount was settled by cheque. The cost of the old asset is RM140,000 and accumulated depreciation till the date of exchange is RM96,000. Prepare: a) Calculate gain or loss on exchange transaction b) Show journal entries c) Prepare Machine Account and Disposal Account

SOLUTION a) Gain/ (loss) = Book Value – Exchange Value = (140,000 – 96,000) – 42,000 = RM2,000 b) Journal entries Dr

Machine (new) Accumulated Depreciation SOCI (loss on exchange) Cr

Machine (old) Bank

120,000 96,000 2,000 140,000 78,000 52

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c) Machine Account and Disposal Account

Balance b/d Disposal Bank

Machine

Machine Account RM 140,000 Disposal 42,000 Balance c/d 78,000 260,000 Disposal Account – Machine RM 140,000 Acc. Dep Machine SOCI (Loss) 140,000

RM 140,000 120,000 260,000 RM 96,000 42,000 2,000 140,000

EXAMPLE 3.13

Sutera Sdn. Bhd. started a business on 1 January 2010. Below are transactions for non-current assets bought and sold during the financial period ended 31 December 2019. Non-Current Assets Machine

Cost (RM) 190,500

Accumulated Depreciation (RM) 28,200

The following transactions occurred during the year 2019. 1 March 2019

Machine A, which was bought on 10 April 2017 at the cost of RM45,000 have been traded in with a new Machine B valuing RM78,000. The trade in value was RM 36,500. The balance was paid by cheque.

25 August 2019 Bough new Machine C cost RM91,000 by cheque. 2 Sept 2019

Machine D, bought on 1 June 2016 for RM36,000 was sold for RM19,000.

All vehicles are depreciated at the rate of 10% using straight line method and is calculated according to monthly basis.

CHAPTER 3

You are required to prepare on 31 December 2019: a) Machine Account b) Accumulated Depreciation Account c) Disposal Account SOLUTION

Year 2016

Machine A RM45,000

2017 4,500 x 9/12 = 3,375 2018 4,500 2019 4,500 x 2/12 = 750 8,625

Machine B RM78,000

Machine C RM91,000

7,800 x 10/12 = 6,500

9,100 x 4/12 = 3,033

Machine D RM36,000 3,600 x 7/12 = 2,100 3,600 3,600 3,600 x 8/12 = 2,400 11,700

Balance RM109,500

= 10,950

SOCI

= 23,633

a) Machine Account

Balance b/d Disposal – B Bank Bank

Machine Account RM 190,500 Disposal – A 36,500 Disposal – D 41,500 Balance c/d 91,000 359,500

RM 45,000 36,000 278,500 359,500

b) Accumulated Depreciation Account

Disposal – A Disposal – D Balance c/d

Accumulated Depreciation Account – Machine RM 8,625 Balance b/d 11,700 SOCI 31,508 51,833

RM 28,200 23,633 51,833

CHAPTER 3

c) Disposal Account

Machine A Machine D

Disposal Account – Machine RM 45,000 Acc. Dep – A 36,000 Machine – B Acc. Dep – D Bank SOCI (Loss) 81,000

RM 8,625 36,500 11,700 19,000 5,175 81,000

3.3.3 Gain or Loss on Revaluation A gain on revaluation is always recognised in equity, under a revaluation reserve (unless the gain reverse’s revaluation losses on the same asset that were previously recognised in the income statement, in this instance the gain is to be shown in the income statement). A revaluation loss should be charged against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of the same asset. Any additional loss must be charged as an expense in the statement of profit or loss. EXAMPLE 3.14

On 1 January 2019, Mezz Sdn. Bhd. acquired a piece of land for RM500,000. This company uses the revaluation model for its land. At 31 December 2019, the fair value was: a) RM710,000 b) RM430,000

SOLUTION a) Surplus on revaluation was RM210,000 (RM710,000 – RM500,000) Dr Land RM210,000 Cr Revaluation Reserve RM210,000 b) Deficit on revaluation was RM50,000 (RM500,000 – RM430,000) Dr Statement of comprehensive income RM70,000 Cr Land RM70,000 55

CHAPTER 3

3.4 PRESENTATION OF PROPERTY, PLANT AND EQUIPMENT IN FINANCIAL STATEMENT Property, plant, and equipment are reported as assets in a separate balance sheet classification. Each asset's cost is reported in one account and the cost used up (depreciated) is reported in another account, called accumulated depreciation. Example as below: Bena Jaya Sdn. Bhd. Statement of Financial Position as at 31 December 2019 Assets

Current Assets Cash and Cash Equivalents Accounts Receivable Less: Allowance for Uncollectible Accounts Total Current Assets Property, Plant, and Equipment Land Buildings Accumulated Depreciation, Buildings Machinery and Equipment Accumulated Depreciation, Machinery and Equipment Total Property, Plant, and Equipment Total Assets

RM 155,000 5,000

260,000 40,000 440,000 100,000

RM 180,000 150,000 330,000 80,000 220,000 340,000 640,000 970,000

Liabilities and Stockholders' Equity Liabilities Current Liabilities Accounts Payable Income Taxes Payable Wages Payable Total Current Liabilities Long-term Liabilities Total Liabilities

135,000 25,000 10,000 170,000 340,000 510,000

Stockholders' Equity Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity

350,000 110,000 460,000 970,000

CHAPTER 3

The effects of property, plant, and equipment on the income statement are shown as depreciation expense, which is an operating expense, and as gains or losses on disposals, which are parts of other revenues and expenses. Bena Jaya Sdn. Bhd. Statement of Comprehensive Income for the year ended 31 December 2019 RM Sales Cost of Goods Sold Gross Profit Operating Expenses Supplies Expense Wages Expense Depreciation Expense, Buildings Depreciation Expense, Machinery and Equipment Insurance Expense Rent Expense Uncollectible Accounts Expense Total Operating Expenses Operating Income Other Revenues and (Expenses) Income Before Taxes Income Taxes Expense Net Income

620,000 372,000 248,000 11,000 135,000 1,000 3,000 15,000 24,000 12,000 201,000 47,000 1,000 48,000 17,000 31,000

EXAMPLE 3.15

Use the information in Example 3.13, you are required to prepare the following for the year ended 31 December 2019. a) Statement of Comprehensive Income (extract) b) Statement of Financial Position (extract)

CHAPTER 3

SOLUTION a)

Statement of Comprehensive Income Expenses Acc. Depreciation – Machine Disposal (loss)

RM 23,633 5,175

Statement of Financial Position Non-Current Assets Machine Accumulated Depreciation

RM 278,500 (31,508) 246,992

CHAPTER 3

EXERCISE 1. A machine is bought on 1 January 2016 for RM1,000 and bought motor vehicle on 1 October 2017 for RM7,200. The firm’s financial year ends on 31 December. The machine is to be depreciated at 10% using the straight-line method and motor vehicle 15% by reducing balance method. You are required to show account for 2016 until 2019: a) Machinery Account b) Accumulated Depreciation Account c) Disposal Account d) Profit and Loss and Balance Sheet (Extracts) 2. A machine was purchased for RM2,000 on 1 January 2017 and is depreciated by 20% each year, using the straight line method. On 31 December 2019, the machine is sold for RM600. Show for the 3 years (2017 - 2019): a) Machine Account b) Accumulated Depreciation Account c) Disposal Account 3. The following information relates to the Motor Vehicles owned by General Motors Sdn. Bhd. Year 2018 1 May

Bought Motor Vehicle RM10,000 on credit form Dumin Garage

1 Sept

Bought Motor Vehicle RM12,000 by cheque

Year 2019 1 May

Bought Motor Vehicle for RM13,000 by cash

20 July

Sold for RM5,000 cash for the motor vehicle which was bought on 1 May 2018.

The financial year of General Motors Sdn. Bhd. ends on 30 April each year. It is the company policy to depreciate its motor vehicles by 20% p.a. on cost.

CHAPTER 3

Required to prepare for year ended 30 April 2019 and 2020: a) Calculate the deprecation b) Motor Vehicle Account c) Motor Vehicle Disposal Account d) Provision for Depreciation Account 4. Suzezzz Sdn. Bhd. started a business on 1 January 2010. Below are transactions for non-current assets bought and sold during the financial period ended 31 December 2018. Non Current Assets

Cost (RM)

Machine

90,500

Accumulated Depreciation (RM) 28,200

The following transactions occurred during the year 2019. 1 March 2019

Machine A, which was bought on 10 April 2017 at the cost of RM 45,000 have been traded in with a new Machine B valuing RM78,000. The trade in value was RM 36,500. The balance was paid by cheque.

25 August 2019

Bough new Machine C cost RM91,000 by cheque.

All vehicles are depreciated at the rate of 10% using straight line method and is calculated according to monthly basis. You are required to prepare on 31 December 2019: a) Machine Account b) Accumulated Depreciation Account c) Disposal Account d) Statement of Comprehensive Income (extract) e) Statement of Financial Position (extract)

CHAPTER 3

5. Huge Profit Sdn. Bhd. have these following machines as at 1 January 2019: Machine

RM80,000

-) Accumulated Depreciation RM24,000 RM56,000 On 1 April 2019, a machine which was acquired on 1 July 2016, was exchanged with a new machine cost at RM26,000. Proceed value is RM11,500. Cost of the old machine is RM16,000. All machine were depreciated at 10% per annum. For the accounting year ends at 31 December 2019, you are required to prepare: a) Machine Account b) Accumulated Depreciation Account c) Disposal Account

CHAPTER 4 Accounting For Trade Receivables Learning Outcome a. State the nature of trade receivables under MFRS 9, MFRS 132 and MFRS 139. b. Provide the discussion on the recognition and measurement of trade receivables. c. Show the presentation of trade receivables in financial statements.

CHAPTER 4

4.0 INTRODUCTION Receivables are all claims against other entities. They are usually settled in cash. Two most common receivables are: •

Trade receivables: Receivables arising from normal operating activities.

•

Nontrade receivables: All receivables arising from activities other than normal operations.

4.1 NATURE OF TRADE RECEIVABLES UNDER MFRS 9, MFRS 132 AND MFRS 139 4.1.1 Definition of Trade Receivables According MFRS 132, trade receivables are an entity’s claim to the future collection of cash or services.

EXAMPLE 4.1

Focus Eye agrees to sell goods on credit to a customer, Mr X. The products sold are 20 units of eyewear at RM300/unit. Are the assets sold considered items of receivables?

SOLUTION Yes. The assets are items of receivables because they are sold as part of normal operating cycle of the company. The company has contractual rights to receive cash in future.

4.2

RECOGNITION AND MEASUREMENT OF TRADE RECEVABLES

4.2.1 Recognition Criteria According to MFRS 9, trade receivables are initially recognized when the entity becomes a party to the contractual provisions of the instruments. 63

CHAPTER 4

EXAMPLE 4.2

Focus Eye sold goods to Company A RM20,000. Company A pays a deposit of RM5,000 on 1 Jan and settles the remaining balance in the future. Is Company A considered as a party to the contractual provisions of the instruments?

SOLUTION Yes, since the company is considered a party because Company A has acquired the goods from Focus Eye. Focus Eye has a contractual right to receive the cash in the future. Trade receivables arise from sale of goods or services on credit. But there are some issues arise regarding trade receivables: •

At what time should the income be recognized by the business and recorded in ledger?

•

Should it be ...  When customers order the goods?  When goods sent to the customers?  When the customers received the goods?  When the customers pay the invoice?

Under accrual concepts, trade receivables are recognized when goods and services are provided, and invoices issued to the customers. KEY POINT Credit: Sales Account Debit: Receivable Account

CHAPTER 4

4.2.2 Accounting For Uncollectible Receivables (Direct Method) The direct write off method of accounting for bad debts record the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debt expenses. KEY POINT Debit: Bad debt expenses Account Credit: Receivables Account (To write-off an uncollectible account)

This entry is made when the account has been determined uncollectible. Since this determination was made after the period in which the sale takes place, the matching principle is violated. EXAMPLE 4.3

Tech Co determines on January 20 that it cannot collect RM500 owed by its customer, Mer Ltd.

SOLUTION Tech Co recognizes the loss using direct write – off method as follows: Jan 20

Bad debts expenses Cr

Account receivables- Mer Ltd

500 500

The debit entry will charge the uncollectible amount directly to the current period’s Bad Debts Expenses account. The credit entry will remove its balance from the Account receivables account in the general ledger (and its subsidiary ledger). Sometimes, an account written-off is later collected due to some factors. Let say, Mer Ltd pays their debts in full on March 10. In this cases, the following two entries record this recovery:

CHAPTER 4

March 20

Accounts Receivables – Mer Ltd Cr

500

Bad Debts expenses

500

(To reinstate account previously write-off) March 20

Cash Cr

500 Accounts Receivable – Mer Ltd

500

(To record full payment of account) 4.2.3 Accounting For Uncollectible Receivables (Estimated Bad Debts Method) Bad debts can be estimated based on sales or on accounts receivable. Since the amount that will eventually become bad are unknown, the uncollectable amount needs to be estimated at the end of the accounting period. This uncollectable estimated amount is known as doubtful debts. KEY POINT Debit: Bad debt expenses Account Credit: Allowance for doubtful debts Account

Allowance for doubtful debts is a contra account used to record estimated debts instead of a direct credit the trade receivable. It is because at this point, we do not know yet which customers will not be able to pay off their debts. In this method, an estimate of the total uncollectible accounts is made at the end of the period, and an expense is recognized. Example: Dr

Bad Debts Expenses Cr

2,000

Allowance for Doubtful Debts

2000

(To record estimated uncollectible accounts.)

CHAPTER 4

When the account is then determined to be uncollectible, the write-off entry is: Dr

Allowance for Doubtful Accounts Cr

400

Accounts Receivables

400

(To write off an uncollectible account.) In some cases, the write off debts can be recovered. The receivable should therefore be reinstated as an asset. Dr

Account receivables Cr

400

Allowance for doubtful debts

400

(To reinstate as an asset an accounts receivable previously written off) A separate entry will be made in the cash receipt journal to record the collection. Dr

Cash Cr

400 Account Receivables

400

(To record receipt of a previously written off account.)

EXAMPLE 4.4

Assume that MusicLand has RM50,000 of account receivables on Dec 31, 2019. Experience suggests that 5% of its receivables is uncollectible

SOLUTION This means that after the adjusting entry is posted, we want the Allowance for Doubtful Debts Account to show a RM2,500 credit balance (5% of RM50,000). Let say the beginning balance is RM2,200, which is 5% of RM44,000 account Receivables on Dec 31, 2018. During 2019, accounts of customers are written off on Feb 6, July 10 and Nov 20. Thus, the account has a RM200 credit balance before Dec 31, 2019 adjustment.

CHAPTER 4

Adjusting entry to give the allowance account the estimated RM2,500 is: Dr

Bad Debt expenses Cr

2,300

Allowance for Doubtful Debt account

2,300

Allowance for Doubtful Debts RM 800 700 500

Feb 6 July 10 Nov 20

Current year write-off

Jan 1

Balance b/d

RM 2,200

Dec 31 Dec 31

Unadjusted balance Adjustment Balance c/d

200 2,300 2,500

Adjusting entry Current year estimate of allowance for doubtful debts

The amount to be recorded is the initial amount that is the gross amount less trade or cash discounts and allowances. KEY POINT Debit: Trade receivables Account Credit: Sales Account Debit: Bank Credit: Trade receivables

CHAPTER 4

4.3 PRESENTATION OF TRADE RECEIVABLES IN FINANCIAL STATEMENTS Trade receivables will be disclosed in Statements of Financial Position. Some examples of SOFP are as

Source: coursehero.com

follows:

Source: https://gamuda.listedcompany.com/newsroom/Gamuda_Annual_Report_2 020_(Page_132_to_Back_Page).pdf

CHAPTER 4

EXERCISE

1. Dondang Company applies the direct write-off method in accounting for uncollectible accounts. Prepare journal entries to record the following transactions. Date July 6

Transaction The company determines that it cannot collect RM9,000 of its receivables from customer, Muffin Co.

July 20

Muffin Co unexpectedly pays its account in full. Dondang records its recovery of this bad debt.

2. At the end of financial year, Kabul Supply uses certain percentage of accounts receivables to estimate bad debts. On Dec 31, 2018, it has outstanding account receivables of RM53,000, and it estimates that 4% will be uncollectible. Prepare the adjusting entry to record bad debt expenses for year 2018 under the assumption that the Allowance for Doubtful Debts Account has RM915 credit balance before the adjustment and RM1,332 debit balance before the adjustment. 3. Wayang Company’s year end unadjusted trial balance shows account receivables of RM89,000, Allowance for Doubtful Debt Accounts of RM500 (credit), and sales of RM270,000. Uncollectible are estimated to be 1.5% of account receivables. Prepare year end adjusting entry for uncollectible. 4. Krup Krap Company determines on May 1 that it cannot collect RM1,000 of its account receivables from its customer, Marina. Apply direct write-off method to record this loss as at May 1. 5. A Dec 31, 2018, Esfahan Company reports the following information for its calendar year: Cash sales

RM1,803,750

Credit sales

RM3,534,000

CHAPTER 4

In addition, its unadjusted trial balance includes the following items: Account receivables

RM1,070,100 (Debit)

Allowance for Doubtful Debts

RM15,750 (Debit)

There was objective evidence that 10% of a RM150,000 debt owed by a debtor, Nathan Company, would probably be uncollectible. An aging analysis of the rest of account receivables indicated that an estimated of %% of these accounts is would be uncollectible. Required: a. Prepare the adjusting entry for this company to recognize bad debts. b. Show how Account Receivables and Allowance For Doubtful Debt appear in Statement of Financial Position as at 31 Dec 2018.

CHAPTER 5 Accounting For Trade Payables, Provisions and Contingent Liabilities/ Assets Learning Outcome a. Describe the nature of trade payables, provisions and contingent liabilities/assets under MFRS 132 and MFRS 137/ MFRS 17 (MPERS : Section 21 and 22). b. Explain the recognition and measurement of trade payable under MFRS 139 (MPERS : Section 22) c. Explain the recognition and measurement of provisions, contingent liability and contingent assets under MFRS 137/MFRS 17 (MPERS : Section 21) d. Describe the presentation of trade payables, provisions, contingent liability and contingent assets in financial statements.

CHAPTER 5

5.0 INTRODUCTION Payables are liabilities to pay for goods or services that have been received or supplied, and have been invoiced or formally agreed with the supplier (and include payments in respect of social benefits where formal agreements for specified amounts exist). Contingent is used for liabilities and assets that are not recognized because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

5.1 NATURE OF TRADE PAYABLES, PROVISIONS AND CONTINGENT LIABILITIES/ ASSETS UNDER MFRS 132 AND MFRS 137/MFRS 17 (MPERS: SECTION 21 AND 22) 5.1.1 Definition of Trade Payables Trade payable (TP) is an account within the general ledger that represents a company's obligation to pay off a short-term debt to its creditors or suppliers. 5.1.2 Category of Trade Payables Trade payables are nearly always classified as current liabilities since they are usually payable within one year. If that is not the case, then such payables can be classified as long-term liabilities. A longerterm liability typically has an interest payment associated with it, and so is more likely to be classified as long-term debt. Other types of payables, such as accrued expenses, dividends payable, or wages payable, are recorded in other accounts to identify them more easily. 5.1.3 Definition of Provisions, Contingent Liabilities and Contingent Assets Provision is another type of liability that should be considered in the preparation of financial statements. Information on provisions and contingencies should be disclosed to the users of financial statements. They need to know when obligations are due, so they can plan for appropriate action. The contingent liability may eventually be recognized as liability, which will reduce the profit and affect the cash flow of the entity. 73

CHAPTER 5

Definition of Provisions Provisions are liabilities of uncertain timing or amount or both (MFRS 137). A provision can be classified as a liability because it has all the characteristics of a liability. Characteristics of a liability: a) A past obligating event has occurred. b) The entity has a present obligation. c) There is a future outflow of benefits. Provisions must be differentiated from other liabilities such as payables and accruals, due to uncertainty about timing or amount. Payables are liabilities to pay for assets, goods, or services. Therefore, the timing and amount of payment to be made are certain. On the other hand, the timing or amount or both payment for provisions is uncertain. Examples: Provisions for litigation, warranties or product guarantees and refunds. The seller has an obligation to honor the warranty and refund the customer. Definition of Contingent Liabilities According to MFRS 137, a contingent liability is defined as : a) A possible obligation that arise from past events and whose existence will be confirmed only by the occurance or non-occurance of one or more uncertain future events not wholly within the control of the entity; or b) A present obligation that arises from past events but is not recognised because: i.

It is not probable that an outflow of the resources embodying economic benefits will be required to settle the obligaion; or

ii.

The amount of the obligation cannot be measured with sufficient reliability.

CHAPTER 5

Definition of Contingent Assets According to MFRS 137, a contingent asset is defined as a possible asset that arises from past events and whose existence will be confirmed only by the occurance or non-occurance of one or more uncertain future events not wholly within the control of an entity. Examples : Claim that an entity is pursuing through legal processes (where outcome is uncertain); possible refunds from the government in tax disputes; possible receipts of monies from donation, bonuses or gifts.

5.2 RECOGNITION AND MEASUREMENT OF TRADE PAYABLES UNDER MFRS 139 (MPERS: SECTION 22) Trade payables is classified as financial liabilities. A financial liability is recognized when an entity becomes a party to a contractual provision of the instrument. Trade payables are measured at transaction price which is at fair value plus transaction cost to the supplier. The bases for the measurement are: a) Historical cost Historical cost measures provide monetary information about assets, liabilities and related income and expenses. b) Current value Current value measures provide monetary information about assets, liabilities and related income and expenses, using information updated to reflect conditions at the measurement date.

The most commonly used is historical cost, of which liabilities are recorded at the amount of proceeds received in exchange of the obligation, or at the amounts of cash or cash equivalents expected to be paid to satisfy the liability.

CHAPTER 5

EXAMPLE 5.1

Vast Pro IT purchased good amounting to RM20,000 from the supplier, with credit term 2/10, net 30. What is the amount of trade payables?

SOLUTION The amount of trade payables is RM20,000. Journal entry: Dr Purchase

RM20,000

Cr Trade payables

RM20,000

When Vast Pro IT settles the paymeny within 10 days; Dr Trade payables Cr Cash Cr Discount received

RM20,000 RM19,600 RM400

5.3 RECOGNITION AND MEASUREMENT OF PROVISIONS, CONTINGENT LIABILITY AND CONTINGENT ASSETS UNDER MFRS 137/ MFRS 17 (MPERS: SECTION 21) 5.3.1 Provisions Recognition of Provisions According to MFRS 137, a provision is recognized when: a) An entity has a present obligation because of past event; b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and c) A reliable estimate can be made of the amount of the obligation. 76

CHAPTER 5

EXAMPLE 5.2

Vast IT Pro provides warranties to their sale of printers to customers. Based on industry experience, it is estimated that the company will incur RM100,000 warranty costs. Does this entity have a present obligation and can the amount for provision be estimated reliably?

SOLUTION Yes, Vast IT Pro has a present obligation (agreement in warranty) arising from a past event (sale of printers) to rectify defects, exchange the defective printers or even make full refund to their customers (probable future outflow). The amount of provision (for the warranty) can be estimated reliably (RM100,000). KEY POINT Past Event An obligation must have ocurred in the past to create an obligation at the reporting date. A provision is not recognized if the costs will be incurred for future operations such as future operating loss.

Present Obligation a) Legal Obligation Arise from a contract, legislation or operation of law. b) Constructive Obligation Arise from entity’s actions where: i.

Based on past practiced, the entity has indicated to other parties that they will accept certain responsibilities; and

ii. As a result, the entity has created a valid expectation on the part of those other parties that they will discharge those responsibilities. 77

CHAPTER 5

Measurement of Provision The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The best estimate is the amount that the entity would rationally pay to settle the present obligation. Estimation are based on prtevious experioence and reports from independent experts. If a provision involves a large population of items, the obligation amount is estimated using ‘expected value approach’.

EXAMPLE 5.3

Vast IT Pro have different item of printers. Past experience and futureexpectation show that 80% of goods sold have no defect, 10% will have minor defect and 10% will have major defects. Repairing costs for minor defects would be RM100,000, whereas repair cost for major defects would be RM300,000. Using the expected value approach, show the journal entries to record the provisions.

SOLUTION Type of printer

Probability of repairs

A B C

0.80 0.10 0.10

Cost of repairs RM 0 100,000 300,000

Expected repairs RM 0 10,000 30,000 40,000

Journal entries: Dr

Repair expenses RM40,000 Cr Provisions for repairs RM40,000 (To record the provisions for repairs)

CHAPTER 5

5.3.2 Contingent Liabilities Recognition of Contingent Liabilities An entity should not recognize a contingent liability unless the possibility of an outflow of resources embodying economic benefits is remote. A brief description of the nature of contingent liabilities needs to be provided and where practicable: a) An estimate of its financial effect; b) An indication of uncertainties relating to the amount or timing of any outflow; and c) The possibility of reimbursement. 5.3.3 Contingent Assets Recognition of Contingent Assets A business should not recognize a contingent asset. It should be disclosed in director’s report where an inflow of economic benefits is probable. EXAMPLE 5.4

Vast IT Pro is taking legal action against their supplier. The legal advice is that it is probable they will win the case and will be awarded RM300,000. Is it possible for Vast IT Pro to recognize this award as asset?

SOLUTION This is a contingent asset. A contingent asset cannot be recognized as as asset, even though the gain is probable and realibly estimated. The gain should only be recognized when is is certain.

CHAPTER 5

5.4 PRESENTATION OF TRADE PAYABLES, PROVISIONS, CONTINGENT LIABILITY AND CONTINGENT ASSETS IN FINANCIAL STATEMENTS Trade payable should be presented as current liability in the Statement of Financial Position. Provisions are reported either as current, or non-current liabilities, depending on the date of expected payment. If the provision is expected to be settled during 12 months from the reporting date, it is classified as current liabilities. Otherwise, the provision should be classified as non-current liabilities. A contingent liability is recorded if the contingency is likely, and the amount of the liability can be reasonably estimated. The liability may be disclosed in a footnote on the financial statements unless both conditions are not met. A contingent asset should be disclosed in the director’s report where an inflow of economic benefits is probable. When the realization of income is certain, then the related asset is not a contingent asset and its recognition as an asset is appropriate. Vast IT Pro Statement of Financial Position as at 31 Dec 2019 Note Non-Current Liabilities Deferred tax liabilities 17 Borrowings 18 Provision for litigation Current Liabilities Trade and other payables 19 Provision for repairs Borrowings 18 Current tax liabilities

RM’000 xxx xxx xxx xxx xxx xxx xxx

Notes to the Financial Statements - Note 19- Trade and Other Payables

Trade payables Third parties Other payables Third parties Deposits received Accruals

Balance as at 1 Jan 2019 RM’000

Balance as at 31 Dec 2019 RM’000

xxx

xxx xxx xxx

xxx xxx xxx 80

CHAPTER 5

EXERCISE 1. A __________ balance is typical for Accounts Payable. 2. The balance in Accounts Payable is decreased with a __________ entry. 3. A RM2,000 invoice from a supplier for goods has terms of 1/10, n/30. If RM100 of the goods were returned to the seller, the amount to be remitted within the discount period is ____________. 4. Bubble Bhd. has been sued by its supplier due to breach of contract. You are required to discuss whether the liability can be recognized assuming that: a) It is probable that Bubble Bhd. would be liable for RM400,000 because of this lawsuit. b) It is not probable that Bubble Bhd. would be liable for RM400,000 because of this lawsuit. c) It is probable that Bubble Bhd. would be liable, however the legal advisers could not estimate the liability. 5. For each situation below, discuss how the entity should account for the transactions in accordance with MFRS 137. Gives reasons for your answer: a) During the financial year 2018, Vast Pro IT sued its main supplier for RM1.5 million damages for faulty supply of materials. As at the reporting date, a decision was favor of the entity. However, the hearing to determine the amount of damages would only be held after the reporting date. b) Mashmallow Bhd sold goods with a warranty for repairs due to manufacturing defects within one year from purchase date. Mashmallow Bhd estimated that the probability of defects will be 25% and estimated repair cost would be RM800,000. c) In 2018, an employee of Bengah Bhd sued the company for serious injuries, because of breach of safety regulations. The claim for the damages amounted to RM600,000. Legal adviser of Bengah Bhd suggested that the result would be unfavorable to the company. In addition, legal costs incurred during 2018 amounted to RM100,000.

REVENUE

CHAPTER 6 Accounting For Revenue and Expenses Learning Outcome a. State the nature of revenue and expenses. b. Provide the discussion on the recognition and measurement of revenues under MFRS 15 (MPERS : Section 23) c. Provide the discussion on the recognition and measurement of expenses. d. Show the presentation of revenues and expenses in financial statements.

CHAPTER 6

6.0

INTRODUCTION

Income includes revenue and gains derived from ordinary activities of a business and includes sales, fees, interest, and dividends. Gains are derived from activities that are not part of the ordinary activities of a business.

6.1

NATURE OF REVENUE AND EXPENSES

6.1.1 Definition of Income/ Revenue Income is defined as increase in economic benefits during the accounting period in the form of inflow of assets or decreases of liabilities that result in increases in equity (Revised Conceptual Framework for Financial Reporting (2018). Revenue is income thet results from the ordinary activities of the business. For example, a furniture manufacturer is selling furniture as their income, but in the case of sell off its old office equipment, this will be recorded as other income. In general, there are three (3) main categories of income : a) Sale of goods. b) Rendering of services; and c) The use of an entity’s assets by others (interest, royalties and dividends). 6.1.2 Definition of Expenses Expenses are decrease in assets, or increase in liabilities, that result in decrease in equity (MASB). Expenses include expenses that arise during ordinary activities of the business. There are two (2) types of expenses: a) Revenue expenditure b) Capital expenditure

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6.2 RECOGNITION AND MEASUREMENT OF REVENUES UNDER MFRS 15 (MPERS: SECTION 23) 6.2.1 Recognition Criteria Accrual basis and realization concept are the two main accounting concepts and assumption to be complied. Malaysian Financial Reporting Standard (MFRS) 15: Revenue from Contracts with Customers was introduced by the Malaysian Accounting Standards Board to provide one comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The core principle of MFRS 15 is that revenue is recognized when the goods or services are transferred to the customer, at the transaction price. Revenue is recognized in accordance with that core principle by applying a 5-step model as shown below: 5 Step Model: Identify the contract A contract is an agreement between two parties. A contract creates enforceable rights and obligations. It may be written, oral or implied by customary business practice. Identify separate performance obligations in the contract(s) Performance obligations are promises in a contract to transfer goods or services, including those a customer can resell or provide to its customer. Determine the transaction price Transaction price is the amount of the consideration a company is entitled to receive in exchange for transferring goods or services to customers. Determining the transaction price is straightforward when the contract price is fixed: it becomes more complex when it is not fixed.

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Discounts, rebates, refunds, credits, incentives, performance bonuses, and price concessions could cause the amount of consideration to be variable. Allocate the transaction price Transaction price should be allocated to distinct performance obligations based on relative standalone selling price. This may be the standalone selling price of a good or service when sold separately to a customer in similar circumstances and to similar customers. If a standalone selling price is not directly observable, estimate it by considering all information that is reasonably available, such as market conditions, specific factors, and class of customers. Recognise revenue when the performance obligation is satisfied Recognise revenue when the promised goods or services are transferred to the customer and the customer obtains control. This may be over time or at a point in time. The new standard provides indicators when control is transferred. Additionally, the new standard introduces a new concept and revenue is required to be recognised over time when: i.

the asset being created has no alternative use to the company; and

ii. the company has an enforceable right to payment for performance completed to date

6.3 RECOGNITION AND MEASUREMENT OF EXPENSES 6.3.1 Revenue Expenditure Revenue expenditure is a cost that will be an expense in the accounting period when the expenditure takes place. Revenue expenditures are often discussed in the context of fixed assets. The revenue expenditures take place after a fixed asset had been put into service and simply keeps the asset in working order. (The amount spent to acquire a fixed asset is referred to as a capital expenditure. The amount of the capital expenditure will be recorded as an asset and will then be moved to the income statement as depreciation expense over the years of the asset's useful life). 85

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Following are some examples of revenue expenditure: a) Wages paid to factory workers. b) Oil to lubricate machines. c) Power required to run machine or motor. d) Expenditure incurred in the ordinary conduct and administration of business, i.e. rent, carriage on saleable goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc. e) Repair and maintenance expenses incurred on fixed assets. f) Cost of saleable goods. g) Depreciation of fixed assets used in the business. h) Interest on borrowed money. i) Freight, cartage, transportation, insurance paid on saleable goods. j) Petrol consumed in motor vehicles. k) Service charges to motor vehicles. l) Bad debts. 6.3.2 Capital Expenditure A capital expenditure is an amount spent to acquire or significantly improve the capacity or capabilities of a long-term asset such as equipment or buildings. Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. The asset's cost (except for the cost of land) will then be allocated to depreciation expense over the useful life of the asset. The amount of each period's depreciation expense is also credited to the contra-asset account Accumulated Depreciation. The total amount spent on capital expenditures during an accounting year is reported under investment activities on the statement of cash flows.

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Following are some examples of capital expenditure: a) Purchase of furniture, motor vehicles, electric motors, office equipment, loose tools, and other tangible assets. b) Cost of acquiring intangible assets like goodwill, patents, copy rights, trade marks, patterns and designs etc. c) Addition or extension of assets. d) Money spent on installation and erection of plant and machinery and other fixed assets. e) Wages paid for the construction of building. f) Structural improvements or alterations in fixed assets resulting in an increase in their useful life or profit earning capacity. g) Cost of issue of shares and debentures (certain expenditures are incurred by the companies when share and debentures are issued). h) Legal expenses on raising loans for the purchase of fixed assets. i) Interest on loan and capital during the construction period. j) Expenditures incurred for the development of mines and plantations etc. k) Money spent to bring a second-hand asset into working condition. l) Cost of replacing factory building from an old place to a new arid better site. m) Premium given for a lease.

EXAMPLE 6.1

Let's assume that a company made a capital expenditure of RM100,000 to install a high efficiency machine. The new machine requires routine maintenance of RM3,000 each month. This RM3,000 is a revenue expenditure since it will be reported on the monthly income statement, thereby being matched with the month's revenues. Normal repairs to the machine are also a revenue expenditure, since the expenditure does not make the machine more than it was, nor does it extend the machine's useful life. As a result, normal repairs will also be reported on the income statement as an expense in the accounting period when the repair is made.

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6.3.3 Recognition Criteria The assets produced and sold, or services rendered to generate revenue also generate related expenses. Accounting standards require that companies using the accrual basis of accounting and match all expenses with their related revenues for the period, so that the income statement shows the revenues earned and expenses incurred in the correct accounting period. The matching principle, part of the accrual accounting method, requires that expenses be recognized when obligations are (1) incurred (usually when goods are transferred, such as when they are sold, or services rendered) and (2) the revenues that were generated from those expenses (based on cause and effect) are recognized. The expense recognition principle states that expenses should be recognized in the same period as the revenues to which they relate. If this were not the case, expenses would likely be recognized as incurred, which might predate or follow the period in which the related amount of revenue is recognized. For example, a business pays RM100,000 for merchandise, which it sells in the following month for RM150,000. Under the expense recognition principle, the RM100,000 cost should not be recognized as expense until the following month, when the related revenue is also recognized. Otherwise, expenses will be overstated by RM100,000 in the current month, and understated by RM100,000 in the following month. Some expenses are difficult to correlate with revenue, such as administrative salaries, rent, and utilities. These expenses are designated as period costs and are charged to expense in the period with which they are associated. This usually means that they are charged to expense as incurred. The expense recognition principle is a core element of the accrual basis of accounting, which holds that revenues are recognized when earned and expenses when consumed. If a business were to instead recognize expenses when it pays suppliers, this is known as the cash basis of accounting.

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If a company wants to have its financial statements audited, it must use the expense recognition principle when recording business transactions. Otherwise, the auditors will refuse to render an opinion on the financial statements.

6.4 PRESENTATION OF REVENUE AND EXPENSES IN FINANCIAL STATEMENTS Revenue and expenses will be disclosed in Income Statement. Some examples of Income Statement are as follows:

Source: masb.org.my

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Source: lumenlearning.com

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EXERCISE 1. The financial statement that reports the revenues and expenses for a period such as a year or a month is the ___________________. 2. Under the accrual basis of accounting, revenues are reported in the accounting period when the _____________________. 3. Under the accrual basis of accounting, expenses are reported in the accounting period when the ____________________.

4. Consider the following list of expenses incurred by a company. Examine this list and determine if each expense is revenue or capital expenditure. A. Purchase of a motor car B. Claim for a meal C. Purchase of shares in a supplier D. Purchase of a new computer E. Payment for hotel accommodation F. Receipt for petrol G. Purchase of raw materials H. Purchase of an autoclave I. Purchase of a set of spanners J. Payment of an insurance premium K. Wages L. Purchase of a new plot of land.

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5. From the following balances from the books of Fana Couture, draw up a trading and profit and loss account for the year ended 30 June 2019. Item Sales revenue Cost of goods sold General expenses Sundry expenses Advertising Electricity costs Rent received Machine repairs Insurance Wages

RM 56,798 32,532 8,450 1,845 2,378 1,650 1,240 2,100 3,400 17,645

CHAPTER 7 Accounting for Partnership Learning Outcome a. Discuss the nature of partnership business according to Partnership Act 1961. b. Demonstrate the types of accounts for partnership. c. Provide the relevant accounting treatments on admission new partners and retirement or death of partners. d. Provide the relevant accounting treatment on the dissolution of partnership.

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7.0 INTRODUCTION As the business expands, firms need more capital and people to manage the business and share its risks. In such a situation, people usually adopt the partnership form of organisation. A partnership is a type of business organizational structure where the owners have unlimited personal liability for the business. The owners share in the profits (and losses) generated by the business. Partnerships are a common form of organizational structure in businesses that are oriented toward personal services, such as law firms, auditors, and landscaping.

7.1 NATURE OF PARTNERSHIP BUSINESS ACCORDING TO PARTNERSHIP ACT 1961 The partnership form when two or more persons come together to carry out a business. Sec. 3(1) of Partnership Act 1961, partnership is the relation which subsists between persons carrying on business in common with a view of profit. 7.1.1 Definition of Partnership A partnership is like a proprietorship in many ways except that it has two or more co-owners. The partners share the profits and losses according to a sharing pattern already agreed. Persons who have entered into partnership with one another are individually called ‘partners’ and collectively called ‘firm’. The name under which the business is carried is called the ‘firm’s name’. A partnership firm has no separate legal entity, apart from the partners constituting it. A partnership must be dissolved if the ownership changes, as when a partner leaves or dies. If the business is to continue as partnership, a new partnership must be formed. Both, sole proprietorship and partnership are convenient ways of separating the business owner’s commercial activities from their personal activities. But legally, there is no economic separation between the owners and the businesses. 7.1.2 The characteristics of partnership business More information on the characteristics of a partnership: a. Ownership: A partnership is a business combination of 2 to 20 partners with the aim of making a profit. When in partnership with banks and stockbrokers, the number of partners should not 94

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exceed 10 people. In professional partnerships such as law firms, accountants, engineers and medical, the number of partners cannot be limited. b. Partnership Agreement: Not a requirement by law. Written agree provide clarification of partners mutual rights and duties. Point of reference for any issues or conflict arises in future. c. Profit and loss: Gains or losses are shared according to the conditions in the Partnership Agreement that are mutually agreed upon and signed together. d. Limited Life: Dissolve when any of the partner withdraw, decease (heirs have right to the share), bankrupt, insane (without court order) or with court order. e. Share of Liability: Unlimited liability for all liabilities incurred by the business (except limited partners), settlement to the extent of private properties. f. Taxation: Partnership not subject to income tax. Individual partners separately liable for income tax based on their share of reported profit. 7.1.3 Partnership Agreement All partnerships are governed by the Partnership Act 1961. In event that the partners make their own agreement, that agreement will prevail. However, for matters not covered within that agreement, the particular provisions in the Partnership Act will be applicable. In the Partnership Act, the main provisions spell out the following: •

All profits or losses are shared equally.

•

Partners are not eligible for interest on their capital injected into the partnership.

•

All partners are entitled to take part in managing the business.

•

Partners are not eligible for salary.

•

Loans or advances by partners to the business will carry an interest at the rate of 8% per year.

•

Most decisions require majority of the partners. However, change of nature of business requires consent by all partners.

•

There must be expressed agreement when a partner is required to leave the partnership.

•

All existing partners must give consent if they want to introduce new partners into the business.

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•

Accounts and books must be kept at the principal place of business and be made available to all partners. All partners are allowed to keep a copy of the accounts.

7.1.4 Type of Partnership Form the business point of view, the partners in the partnership business may be classified into various types. The following of three types of partnership: a. General Partner The partner participates fully in the operational managerial functions of the business and is also fully liable for the partnership debts. b. Sleeping partner A partner who does not participate in the operational and managerial functions of the business. However, he is also fully liable for the partnership debts. c. Limited liability partner A partner whose liability is limited to the amount of capital invested by him into the partnership business. In other words, his personal possessions cannot be taken to pay the partnership debts. A limited liability partner has the option to take part in the managerial functions of the business. 7.1.5 Advantages and Disadvantages of Partnership Advantages of Partnership a) Accumulation of skills, knowledge and experiences. If one partner has technical knowledge, other could be marketing or finance expert. Thus, the managerial resources of the firm are enhanced. b) Combines the financial strength of all partners, as the liability of partners is joint and several. Not only is the ability to contribute capital greater, it also enhances the borrowing capacity of the firm. c) The profits and losses are shared by all partners. If the firm is unable to meet any of its payment obligations, all partners are responsible. Thus, partnership offers risk reduction as the risk is spread across partners. d) Ease of formation compared to company, where any two persons capable of entering into contract can start partnership. 96

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Disadvantages of Partnership a) Partners become fully liable for all claims against the firm to an unlimited extent. b) Liable for actions conducted by other partners on behalf of firm. c) Dissolution when partner(s) withdraw, decease, bankrupt or with court order d) Restricted authority and decision making. All decisions need consent of partners eg; changes in nature of business and admission of new partner(s). e) Success of the partnership depends on quality of relationship amongst partners.

7.2 TYPE OF ACCOUNT FOR PARTNERSHIP There is no much different between the account of partnership firm and that the sole proprietorship (provided there is no change in the firm itself). The only difference to be noted is that instead of one Capital Account there will be as many Capital Accounts as there are partners. Following are the specific issues that require special attention in case of partnership accounts: a. Maintenance of capital accounts of partners b. Ascertainment and allocation of profit and losses c. Revaluation of partnership (new admission and death) d. Dissolution of partnership 7.2.1 Partners' Capital Accounts In case of partnership firm, the transactions relating to partners are recorded in their respective capital accounts. Normally, each partner's capital account is prepared. There are two methods by which the capital accounts of partners can be maintained. These are: a. Fluctuating Capital Method Under the fluctuating capital method, only the capital account for each partner is maintained. It records all items affecting partner's account like interest on capital, drawings, interest on drawings, 97

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salary, commission, and share of profit or loss in the capital account itself. As a result of these, the balance in the capital account keeps on fluctuating. Partners’ Capital Account Drawing Interest on drawing Share of loss Withdrawal of capital Balance c/d

RM xxx xxx xxx xxx xxx xxx

Balance b/d Additional Capital Interest on capital Salary Commission Share of profit

RM xxx xxx xxx xxx xxx xxx xxx

b. Fixed Capital Method Under the fixed capital method, the capitals of the partners shall remain fixed. For all transactions, a separate account called 'Partner's Current Account' is opened. Partners’ Capital Account Withdrawal capital Balance c/d

RM xxx xxx xxx

Balance b/d Additional Capital

RM xxx xxx xxx

Partners’ Current Account Balance b/d Drawing Interest on drawing Share of loss Balance c/d

RM xxx xxx xxx xxx xxx xxx

Balance b/d Interest on capital Salary Commission Share of profit Balance c/d

RM xxx xxx xxx xxx xxx xxx xxx 98

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EXAMPLE 7.1

Ahmeed and Sulaiman commenced business as partners on 1st April 2019. Ahmeed contributed RM40,000 and Sulaiman RM25,000 as their share of capital. The partners decided to share their profits in the ratio of 2:1. Ahmeed was entitled to a salary of RM6,000 a year. Interest on capital was to be provided at 6% per year. The drawings of Ahmeed and Sulaiman RM4,000 and RM8,000 respectively. The profits of the firm after providing Ahmeed salary and interest on capital were RM12,000.

SOLUTION i.

Capitals are fluctuating Partners’ Capital Account

Drawing Balance c/d

Ahmeed RM 4,000 52,400

56,400

Sulaiman RM 8,000 22,500

30,500

Bank Interest on capital Salary Share of profit

Ahmeed RM 40,000 2,400

Sulaiman RM 25,000 1,500

6,000 8,000 56,400

4,000 30,500

Ahmeed RM 40,000 40,000

Sulaiman RM 25,000 25,000

ii. Capitals are fixed Partners’ Capital Account

Balance c/d

Ahmeed RM 40,000 40,000

Sulaiman RM 25,000 25,000

Bank

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Partners’ Current Account

Drawing Balance c/d

Ahmeed RM 4,000

Sulaiman RM

12,400

16,400

8,000

Interest on capital Salary Share of profit Balance c/d

Ahmeed RM 2,400

Sulaiman RM 1,500

6,000 8,000 16,400

4,000 2,500 8,000

7.2.2 Appropriation of Profit and Loss The net profit (after charging the interest on capital, partners' salary and commission and after taking into account the interest on drawings) is to be shared by all the partners in the agreed profit sharing ratio. For this purpose, Profit and Loss Appropriation Account may be prepared to show how net profit is to be distributed among the partners.

Profit and Loss Appropriation Account Interest on capital: Partner A xxx Partner B xxx Partners’ salaries Partners’ commission Share of profit Partner A xxx Partner B xxx

RM xxx xxx xxx xxx xxx

Net profit as per SOCI Interest on drawing: Partner A xxx Partner B xxx Share of loss Partner A xxx Partner B xxx

RM xxx xxx xxx xxx

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EXAMPLE 7.2

Ava and Budi have been in partnership for several years. The financial year of their business ends on 31 December. As at 31 December 2019 the partners had the following balances on their capital and current accounts: Partners’

Capital Account (RM)

Current Account (RM)

60,000 130,000

1,500 1,200

Ava Budi

Loan Account (RM) 10,000 -

On the initial formation of the partnership an agreement drawn up on behalf of the partners included the following terms: •

Partners would receive interest on their capital at the rate of 3% per year

•

Interest on drawing to be charged at 5% per year

•

Ava would receive a partnership salary of RM5,000 per year.

•

Remaining profits or losses would be shared equally.

•

Interest on loan 8% per year.

Partnership generated a net profit of RM14,800. Drawings by partners: •

Ava RM1,800

•

Budi RM3,200

You are required to prepare: a) Profit and Loss Appropriation Account b) Partnership Current Account c) Extract of Financial Position as at 31 December 2019

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SOLUTION a) Profit and Loss Appropriation Account Interest on capital: Ava 1,800 Budi 3,900 Partners’ salaries - Ava Share of profit Ava 2,175 Budi 2,175

RM 5,700 5,000

RM 14,800

Net profit as per SOCI Interest on drawing: Ava 90 Budi 160

250

4,350 15,050

15,050

b) Partners’ Current Account

Drawing Interest on drawing Balance c/d

Ava RM 1,800 90

Budi RM 3,200

9,385

3,915

11,275

7,275

160

Balance b/d Interest on capital Salary Share of profit Interest on loan

Ava RM 1,500 1,800

Budi RM 1,200 3,900

5,000 2,175 800 11,275

2,175 7,275

c) Extract of Financial Position as at 31 December 2019 Finance by: Capital Account Current Account Current Liability: Loan - Ava

(RM) Ava Budi Ava Budi

60,000 130,000 9,385 3,915 10,000

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7.3 ADMISSION NEW PARTNERS AND RETIREMENT OR DEATH OF PARTNERS It is essential to know the true position of the capital of the old partners or the existing partners in case of admission, retirement or death of a partner. Hence, in order to ascertain the original or true value of the assets and or liability on a certain date for the said purpose, the assets and liability of the firm must be revalued. 7.3.1 Revaluation Whenever there is a change in the profit and loss sharing ratio or a change in the composition of a partnership (admission of a new partner, withdrawal or death of an old partner) all assets (including goodwill) and liabilities must be revalued and adjusting entries are required to be made immediately. A revaluation account will be opened to record the gain and losses on revaluation of assets and liabilities. Adjustment of assets and liabilities revaluation will affect partners.

KEY POINT Gain on revaluation: Fair value (Market value) > Net book value Loss on revaluation: Fair value (Market value) < Net book value

The overall profit or loss on revaluation of all assets and liabilities of the partnership should be shared immediately among the old partners in the old profit and loss sharing ratio by transferred to the partners’ capital account. The partners’ capital balances would be increased by profit on revaluation or decreased by the loss on revaluation.

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EXAMPLE 7.3

Tarmizi, Suzen dan Chuah were in partnership. The following shows their Balance Sheet as at 31 December 2019. Balance Sheet as at 31 December 2019 Buildings Motor vehicles Office fittings Inventory Debtors Bank

RM 80,000 35,500 13,100 20,400 45,300 20,700 215,000

Capital

Tarmizi Suzen Chuah

RM 95,600 64,200 48,400

Creditors

6,800 215,000

The partners had shared profits and losses in the ratio: Tarmizi 5: Suzen 3: Chuah 2. On 1 January 2019, the profit and loss sharing ratio was altered to: Tarmizi 2: Suzen 2: Chuah 4. The following assets were revalued to: buildings RM175,000, motor vehicles RM26,000, inventory RM18,900, office fittings RM10,900. Show the required entries in the revaluation account.

SOLUTION Revaluation Account RM 9,500 1,500 2,200

Motor vehicles (35,500–26,000) Inventory (20,400–18,900) Office fittings (13,100–10,900) Capital Account Tarmizi (5/10 x 81,800) 40,900 Suzen (3/10 x 81,800) 24,540 Chuah (2/10 x 81,800) 16,360 81,800 95,000

Buildings (175,000–80,000)

RM 95,000

95,000

The net profits on revaluation are transfer to the partners’ capital account, based on the old profit sharing ratio.

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7.3.2 Goodwill When partners carry on business with their firm for a long time, they earn a reputation for it. This reputation translates in monetary terms into expected future profits above normal profits. Goodwill usually exists because of factors such as managerial skills, good employee relations, strategic business standing and good product or service reputation. Goodwill is not a physical asset but its treat as an intangible asset. Since goodwill as an assets for company, it must be revaluated when changing in partnership occur. Partners have to compute their firm’s goodwill for the following purposes: •

A new partner joins a firm

•

An existing partner retires or dies

•

Partners want to dissolve the firm

•

Partners change their profit sharing ratio

There are two methods used to determine goodwill value: a. Business value method b. Average profit method Business Value Method This method refers to a value of business which exceeds the net assets of business (total asset- total liability). Value of business is an estimated value by comparing company or business profit with rate of return.

EXAMPLE 7.4

Calculate the goodwill value based on the following information: Average annual profit

RM50,000

Expected rate of return

10% per year

Total net assets

RM550,000

Total liability

RM120,000

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SOLUTION Value of business

= 50,000/10% = RM500,000

Goodwill value

= RM500,000 – (550,000-120,000) = RM70,000

Average Profit Method The value of goodwill is equal to tha value of the average annual net profit for a spesified pas number of year. This is often reffered to as χ years purchase of the net profit.

EXAMPLE 7.5

On 1 January 2019, goodwill was value as equal to 2 years purchase of the average annual profit of the last 5 years. 2014 40,000 2015 50,000 2016 70,500 2017 81,000 2018 93,400 Required: Calculate the amount of goodwill. SOLUTION Average

= (40,000+50,000+70,500+81,000+93,400)/5 = RM66,980

Goodwill value

= RM66,980 x 2 = RM133,960

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7.3.3 Accounting for Goodwill There are two ways in showing goodwill, a. A goodwill account is open. b. A goodwill account is not open; write-off goodwill.

A goodwill account is open The treatment to retain goodwill in the business as an intangible asset is in line with the argument that when a change in partnership arises, the old partnership is dissolved and a new partnership will take over. If goodwill is retained, the entries are as follows: KEY POINT Debit: Goodwill Account Credit: Partners’ Capital

EXAMPLE 7.6

Henry and Jason had been partners for a number of years, sharing profits and losses equally. The partners agreed to change the profit and loss sharing ratio as follows: Henry 2 : Jason 1 with effect from the financial year starting on 1 June 2019. Suppose the partnership’s goodwill was valued for the first time at RM150,000. SOLUTION Goodwill Account Capital Henry Jason

75,000 75,000

RM 150,000 150,000

Balance c/d

RM 150,000 150,000

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Partners’ Capital Account

Balance c/d

Henry RM 175,000

Jason RM 225,000

175,000

225,000

Balance b/d Goodwill

Henry RM 100,000 75,000 175,000

Jason RM 150,000 75,000 225,000

Extract of Financial Position as at 1 June 2019 RM

Intangible Assets Goodwill Finance by: Capital Account

150,000 Henry Jason

175,000 225,000

A goodwill account is not open The treatment to write-off goodwill is based on the argument that the value of goodwill is highly subjective because it is based on estimates. Hence, the amount may not be reliable and should not be recorded as an asset. I goodwill is written-off, the accounting entries required are as follows:

KEY POINT Debit: Goodwill Account Credit: Partners’ Capital Account (old partners in the old profit sharing ratio) Debit: Partners’ Capital Account Credit: Goodwill Account (new partners in the new profit sharing ratio)

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EXAMPLE 7.7

Using the information in Example 7.6, treatments are shown below SOLUTION Goodwill Account Capital Henry Jason

75,000 75,000

Capital Henry Jason

150,000 150,000

100,000 50,000

RM 150,000 150,000

Partners’ Capital Account

Goodwill Balance c/d

Henry RM 100,000 75,000 175,000

Jason RM 50,000 175,000 225,000

Balance b/d Goodwill

Henry RM 100,000 75,000 175,000

Jason RM 150,000 75,000 225,000

Extract of Financial Position as at 1 June 2019 Finance by: Capital Account

RM Henry Jason

75,000 175,000

7.3.4 Admission of New Partner When a firm requires additional capital or managerial help it can admit a new partner in its business. Beside, when a new partner is admitted a new agreement is formed and thus the firm is reconstituted. The new partner acquires the right to share the assets of the firm for which he brings in the capital and the right to share the future profits of the firm for which he brings Goodwill. On admission of a new partner, the profit sharing ratio changes, the assets and liabilities are revalued and goodwill is calculated and distributed among the old partners in their sacrificing ratios. 109

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EXAMPLE 7.8

Rahim and Zaman are in partnership for several years, sharing profit and loss equally. The statement of financial position is as follows: Statement of Financial Position as at 31 July 2019 Non-Current Assets Premises Furnitue Current Assets Bank Invenotry Debtors

Capital Account Rahim Zaman Currrent Account Rahim Zaman Current Liability Creditors

230,000 120,500

350,500

21,600 24,200 54,000

99,800 450,300

100,000 200,000

300,000

46,800 56,600

103,400 46,900 450,300

Rahim and Zaman invited Devid to joint them in the partnership. David agreed to pay RM80,000 into the new partnership. Profit and losses are to be shared in the proportion of 1:2:1. Assets and liability are revalued: Goodwill

RM50,000

Premises

RM300,000

Furniture

RM110,000

Inventory

RM20,000

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Required to prepare: a) Revaluation Account b) Goodwill Account c) Partners’ Capital Account d) Statement of Financial Position as at 1 August 2019

SOLUTION a) Revaluation Account Furniture Inventory Capital Account Rahim Zaman

RM 10,500 4,200 27,650 27,650

RM 70,000

Premises

55,300 70,000

70,000

b) Goodwill Account Capital Rahim Zaman

25,000 25,000

RM 50,000 50,000

Capital Rahim Zaman David

12,500 25,000 12,500 50,000 50,000

c) Partners’ Capital Account

Goodwill Balance c/d

Rahim Zaman David RM RM RM 12,500 25,000 12,500 140,150 227,650 67,500 152,650 252,650

80,000

Balance b/d Bank Revaluation Goodwill

Rahim Zaman RM RM 100,000 200,000 27,650 27,650 25,000 25,000 152,650 252,650

David RM 80,000 80,000 111

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d) Statement of Financial Position as at 1 August 2019 Non-Current Assets Premises Furnitue Current Assets Bank Invenotry Debtors Capital Account Rahim Zaman David Currrent Account Rahim Zaman Current Liability Creditors

300,000 110,000

410,000

101,600 20,000 54,000

175,600 585,600

140,150 227,650 67,500

435,300

46,800 56,600

103,400 46,900 585,600

7.3.5 Death or Retirement of a Partnership One major changes in the constitution of a partnership firm may occur if a partner retirement from the firm or in the event of his death. In both cases, the partner’s account will have to be settled, and new ratios will have to be calculated. There is also the issue of treatment of goodwill. Goodwill needs to be distributed to the partners in terms of profit and loss ratio as the goodwill earned by the firm is the result of the efforts of all partners in the past.

EXAMPLE 7.9

Azlan, Yusof and Tarmizi were in partnership sharing ratio profit and losses in the ratio 3:2:1 respectively. The following is the statement of financial position for the current year:

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Statement of Financial Position as at 30 September 2019 Non-Current Assets Machine Motor Vehicle Furniture & fitting Current Assets Bank Invenotry Debtors

Capital Account Azlan Yusof Tarmizi Currrent Account Azlan Yusof Tarmizi Current Liability Creditors

80,000 120,000 35,500

235,500

15,100 8,200 6,000

29,300 264,800

90,000 70,000 78,000

238,000

6,450 6,300 5,200

17,950 8,850 264,800

On 1 October Yusof decided to retire from the partnership. Azlan and Tarmizi agreed to revalue all assets and liability for this situation. The following assets and liability were revalued: Machine Motor Vehicle Furniture & fittings Goodwill

RM75,000 RM100,000 RM30,000 RM20,000

Azlan and Tarmizi agreed to share the new ratio of profit and losses by 3:2 respectively. The balance of Yusof’s current account was to be transferred to his capital account on retirement date. Yusof agreed to give RM60,000 as a loan to the partnership with as interest rate of 7% per year. The partnership would be paid the balance to Yusof’s capital account with the cheque. 113

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Required to prepare: a) Revaluation Account b) Goodwill Account c) Partners’ Capital Account d) Statement of Financial Position as at 1 October 2019

SOLUTION a) Revaluation Account RM 5,000 20,000 5,500

Machine Motor vehivle Furniture & fitting

30,500

Capital Account Azlan 15,250 Yusof 10,167 Tarmizi 5,083

30,500 30,500

Goodwill Account Capital Azlan Yusof Tarmizi c)

10,000 6,667 3,333

RM 20,000 20,000

Capital Azlan Tarmizi

12,000 8,000 20,000 20,000

Partners’ Capital Account

Goodwill Revaluation Loan Bank Balance c/d

Azlan RM 12,000 15,250 72,750 100,000

Yusof Tarmizi RM RM 8,000 10,167 5,083 60,000 12,800 68,250 82,967 81,333

Balance b/d Goodwill Current Ac.

Azlan RM 90,000 10,000 100,000

Yusof Tarmizi RM RM 70,000 78,000 6,667 3,333 6,300 82,967

81,333

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d) Statement of Financial Position as at 1 October 2019 Non-Current Assets Machine Motor vehivle Furniture & fitting Current Assets Bank Invenotry Debtors Capital Account Azlan Tarmizi Currrent Account Azlan Tarmizi Current Liability Creditors Loan - Yusof

75,000 100,000 30,000

205,000

2,300 8,200 6,000

17,600 221,500

72,750 68,250

141,000

6,450 5,200

11,650 8,850 60,000 221,500

7.4 DISSOLUTION OF PARTNERSHIP When all the partners resolve to dissolve the partnership, the dissolution of business occurs. The partnership will be dissolved for the following reasons: a. death, unethical or bankruptcy of one of the partners b. agreement between fellow partners c. when the business is unable to settle its debt and is forced to close d. by order of law (court) e. when it is not profitable to continue business f. when the purpose of establishing a partnership is reached g. when the partnership firm is changed to a limited company 115

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Following are the actions to be taken when businesses are dissolved: a. Sold all the assets (except cash or bank) for cash and recognize a gain or loss on realization. b. Allocate the gain or loss from realization to the partners based on their income ratios. c. Pay partnership liabilities in cash. d. Any remaining balances in the current account are transferred to the capital account. e. Distribute any remaining cash to the partners on the basis of their capital balances.

EXAMPLE 7.10

Elly, Ella and Bella who are in partnership, operate furniture business and they share their profits and losses in the ratio 2: 1: 3 respectively. Assets, liabilities and equity positions are as shown below: Statement of Financial Position as at 30 November 2019 Non-Current Assets Machine Office Equipment Motor Vehicle Current Assets Bank Invenotry Debtors

Capital Account Ella Elly Bella Currrent Account Ella Elly Bella Loan - Ella Current Liability Creditors

250,000 150,000 200,000

600,000

50,000 56,800 20,000

126,800 726,800

290,000 70,000 240,000

600,000

27,000 23,500 40,500

91,000 20,000 15,800 726,800

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Upon dissolution, the following matters were agreed: i.

Machine, office equipment and inventory was sold for RM220,000, RM100,000 and RM22,000 respectively.

ii. Ella took over the motor vehicle for RM150,000. iii. All debtors settled their debt except for RM2,600 which the partners considered as bad debts. iv. Dissolution expenses of RM7,200 were paid. v. Creditors aggred to settle full payment for RM12,000. vi. Loan from Ella was paid in full amount. Required to prepare: a) Realization Account c) Partners’ Capital Account d) Bank Account

SOLUTION a) Realization Account Machine Office Equipment Motor Vehicle Invenotry Debtors Bank - Dissolution expenses Capital A/c loan Ella

RM 250,000 150,000 200,000 56,800 20,000 7,200 20,000

704,000

Bank: Machine Office Equipment Inventory Debtors Capital A/c. Ella Motor Vehicle Creditors (Discount) Loan - Ella Capital A/c-Loss Ella 56,933 Elly 28,467 Bella 85,400

RM 220,000 100,000 22,000 17,400 150,000 3,800 20,000

170,800 704,000

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b) Bank Account Balance b/d Realisation: Machine Office Equipment

RM 50,000 220,000 100,000

Inventory

22,000

Debtors

17,400 409,400

Creditors Realization expenses Capital A/c Ella 130,067 Elly 65,033 Bella 195,100

RM 12,000 7,200

390,200 409,400

c) Partners’ Capital Account

Realization Motor Vehicle Bank

Ella Elly RM RM 56,933 28,467 150,000 130,067 65,033 337,000 93,500

Bella RM 85,400 Balance b/d Current Ac. 195,100 Realisation Loan 280,500

Ella Elly RM RM 290,000 70,000 27,000 23,500 20,000 -

Bella RM 240,000 40,500 -

337,000 93,500

280,500

7.4.1 Rules of Garner vs. Murray If a partner with a debit balance in his capital account is unable to bring in additional cash to cover his capital account, then the rules of Garner vs. Murray are imposed. In this case, if the partner not able to pay full or part due to certain circumstance, his balance will be borne by the partners. The amount contributes by these partners will be based on their opening capital ratio.

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EXAMPLE 7.11

Lee, Tee and Chan are sharing partners doing business selling watches. They share a profit loss ratio of 2: 2: 1. On 31 July 2019, the statement of financial position was as follows: Statement of Financial Position as at 31 July 2019 Non-Current Assets Store Equipment Office Supplies

RM 16,800 15,660

Current Assets Bank Inventory Debtors

Capital Account Lee Tee Chin Currrent Account Lee Tee Chin Current Liability Creditors

1,200 3,800 5,000

42,460

11,000 9,000 5,000

25,000

4,258 6,000 2,402

12,660 4,800 42,460

The three partners wanted to retire and sell their business on 31 July 2019. The following details are about the dissolution. i.

The store equipment was sold at RM14,000 while the inventory was sold at RM3,000.

ii. Office equipment taken over by Tee at RM12,000 iii. The dissolution fee of RM360 was paid. iv. A sum of RM3,500 is collected from the debtor after deducting bad debts and discounts. v. The creditors agree to accept RM3,000 as full payment for amount due to them.

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vi. After all assets are realized and the liabilities are explained, Tee is declared bankrupt and unable to settle his debt. Required to prepare: a) Realization Account c) Partners’ Capital Account d) Bank Account

SOLUTION a) Realization Account Store Equipment Office Supplies Invenotry Debtors Bank - Dissolution fee

RM 16,800 15,660 3,800 5,000 360

41,620

Bank: Store Equipment Inventory Capital A/c. Tee Office Supplies Bank : Debtors Creditors Capital A/c-Loss Lee 2,928 Tee 2,928 Chin 1,464

RM 14,000 3,000 12,000 3,500 1,800

7,320 41,620

b) Bank Account Balance b/d Realization: Store Equipment Inventory Debtors

RM 1,200 14,000 3,000 3,500 21,700

Creditors Realisation expenses Capital A/c Lee 7,336 Tee 7,336 Chin 3,668

RM 3,000 360

18,340 21,700 120

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c) Partners’ Capital Account

Realisation Off. Supplies Capital A/c Bank

Lee RM 2,928 4,994 7,336

Tee RM 2,928 12,000 7,336

15,258

22,264

Chin RM 1,464 Balance b/d Current A/c 2,270 Capital A/c 3,668 Lee Chin 7,402

Lee RM 11,000 4,258

15,258

Tee RM 9,000 6,000

Chin RM 5,000 2,402

4,994 * 2,270 * 22,264 7,402

* Tee could not be paid the remaining balance RM7,264 and this balance was paid by Lee and Chan. It calculates by their opening capital ratio. Lee = 11,000/ (11,000 + 5,000) x 7,264

= RM4,994

Chin = 5,000/ (11,000 + 5,000) x 7,264

= RM2,270

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EXERCISE 1. Hamid and Nazri established a partnership on 1 January 2019. They agreed to share profits and losses in the ratio of 2:1. Other information for the year ended 31 December 2010 is as follows: • Cash contributed on 1 January 2019: Hamid RM80,000, Nazri 60,000 • Rate of interest on capital: 5% per annum. • Rate of interest on drawings: 10% per annum. • Nazri was entitled to an annual salary of RM10,000. • Drawings made on 1 July 2010: Hamid RM9,000, Nazri RM6,200. • Net profit for the year amounted to RM82,000. Prepare: a) Profit and Loss Appropriation b) Capital accounts of the partners c) Current Account of the partners 2. Kamal and Tan are partners sharing profit and losses in the ratio of 2:3. Their statement of financial position was as follows: Statement of Financial Position as at 31 December 2018 Non-Current Assets Builing Machine Office Equipment Current Assets Bank Debtors Inventory Capital Account Kamal Tan Current Liability Creditors

20,000 13,000 15,000

48,000

7,000 26,000 6,000 40,000 30,000

39,000 87,000 70,000 17,000 87,000 122

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Mikahil is admitted as a partner and assets and liability are revalued as follows: i.

Create a Provision for doubtful debt on debtors at RM800.

ii. Building RM50,000, machine RM 20,000, office equipment RM13,000, iii. Creditors were RM15,000. Prepare revaluation account before the admission of Mikahil. 3. Aishah, Beeha and Chantik are partners sharing profit and losses in the ratio of 3:2:1 respectively. The following is a list of balance extracted from the account of the partnership as at 31 March 2019. Item Plant & Machinery Building Motor Vehicle Debtors Stock Bank

RM 70,000 90,000 16,000 21,000 50,000 5,000

Creditors Capital Account: Aishah Beeha Chantik Current Account: Aishah Beeha Chantik

38,000 80,000 60,000 50,000 5,000 9,000 10,000

Beeha retires on that date, subject to the following adjustments: i.

The Goodwill of the firm to be valued at RM36,000.

ii. Plants and machinery RM63,000, building RM100,000 and motor vehicle RM13,600. iii. Stock RM45,000.

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Prepare: a) Revaluation Account b) Capital Account for partners c) Statement of Financial Position (after Beeha retired) 4. Amirul, Akmal and Asyraf are partners sharing profits in the ratio of 5:3:2. Their Balance Sheet as on 31 July 2019 was as follows: Balance Sheet as at 31 July 2019 Assets Buildings Machine Furniture

RM 200,000 40,000 80,000

Cash at bank Stock Debtors

60,000 16,000 24,000 420,000

Liabilities Creditors Bank loan Capitals: Amirul Akmal Asyraf

RM 30,000 120,000 70,000 90,000 110,000 420,000

The firm was dissolved on that date. Close the books of the firm with following information: i.

Buildings realized for RM190,000.

ii. Stock were took over by Asyraf RM15,000. iii. Debtors were recovered 5% less. iv. Machinery sold for RM48,000 and furniture for RM75,000. v. Bank loan was settled for RM110,000. vi. Creditors were settled at 10% discount. vii. Realization expenses RM12,000 for completing the dissolution process. Prepare: a) Realization Account c) Partners’ Capital Account d) Bank Account

124

REFERENCES

References: Accounting Coach. What is revenue expenditure? Available at https://www.accountingcoach .com/blog/what-isa-revenue-expenditure Accounting for Partnerships. Available at https://www.accaglobal.com Accounts Payable: Definition | Recognition, and Measurement | Recording | Example. Available at https://www.wikiaccounting.com/accounts-payable/ Azlina Ahmad, Nur Ashikin Mohd Saat, Radziah Mahmud, Rosmini Mohd Aropin, Siti MAnisah Ngalim, MAswati Abd Talib & Asna Atiqa Abdullah (2020). Financial Accounting and Reporting 1. Oxford Fajar Sdn. Bhd., Selangor. Expenses recognition principle. Available at https://www.accountingtools.com/articles/ expense-recognitionprinciple.html Fatimah Abd Rauf, Amla Abu and Radziah (2017). Financial Accounting for Non-Accounting Students, Second Edition. McGraw-Hill, Selangor. IAS

39 — Financial Instruments: Recognition https://www.iasplus.com/en/standards/ias/ias39

and

Measurement.

Available

Malaysian Accounting Standard Board (MASB). Available at https://www.masb.org.my Price Water House Coopers. MFRS 15 : Revenue from contract with customers. Available at https://www.pwc.com/my/en/services/assurance/mfrs/revenue-mfrs15.html Revenue Expenditure: Definition and explanation. Available at http://www. accountingexplanation. com/revenue_expenditures.htm Roshayani Arshad, Laily Umar, Siti Maznah Mohd Arif (2006). Financial Accounting an Introduction, Second Edition. McGraw-Hill, Selangor. Syaiful Baharee, Nazura Arif and Hasmawazi Hamzah (2013), Financial Accounting 1, Third Edition, Kuala Lumpur; Polytechnic Series Oxford Fajar. Trade payables. Available at https://www.accountingtools.com/articles/2017/5/15/trade-payable Trade Receivables. Available at https://www.wallstreetmojo.com/trade-receivables/

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FINANCIAL ACCOUNTING 2

Articles inside

Bank reconciliation statement

Exercise

Presentation of trade payables, provisions, contingent liability and contingent assets in financial statements

References

Exercise