FINANCIAL ACCOUNTING & REPORTING 2 (BAC2634)

TRI 1, 2014/2015
GROUP ASSIGNMENT NO. 2
SECTION B02
INSTRUCTIONS:
1) Form a group with a maximum of 3 members.
2) Answer all questions.
3) The due date for submission is 18 September 2015 (Week 12) by 5 pm. (Late penalty
of 10% of the total marks of this assignment will be applied each day the piece is
late).

QUESTION 1
DLin is a large public listed company involved in the construction industry. It is part way through a
contract to build a hockey stadium at a contracted price of RM600 million.
Details of the progress of this contract at 1 January x3 are shown below:
RM million
Cumulative sales revenue invoiced

300

Cumulative cost of sales to date

224

Profit to date

76

The following information has been extracted from the accounting records at 31 December x3:
RM million
Total progress payments received for
work certified at 30 November x3.

360

Total costs incurred to date (excluding

rectification costs below)

390

Rectification work

34

DLin received progress payments of 90% of the work certified at 30 November x3. DLins
surveyor estimated the sales value of further work done in December x3 would be RM40 million.
At 31 December x3, the estimated remaining costs to complete the contract were RM90 million.

Rectification costs were incurred in widening access roads to the stadium. This was the result of
an error by DLins architect when he made his initial drawings.
DLin calculates the percentage of completion of its contract as the proportion of sales value
earned to date compared to the contract price.
INSTRUCTION:
Using the case study matrix, prepare extracts of the financial statements for DLin for the above
contract for the year to 31 December x3.
QUESTION 2
The directors of Line Berhad are disappointed by the draft profit for the year ended 30
September 2013. The companys assistant accountant has suggested the area where she believes
the reported profit may be improved:
a. A major item of plant that cost RM20 million to purchase and install on 1 October 2010 is
being depreciated on a straight-line basis over a five-year peLined (assuming no residual
value). The plant is wearing well and at the beginning of the current year (1 October 2012) the
production manager believed that the plant was likely to last eight years in total (i.e. from the
date of its purchase). The assistant accountant has calculated that, based on an eight-year life
(and no residual value) the accumulated depreciation of the plant at 30 September 2013 would
be RM75 million (RM20 million/8 years x 3). In the financial statements for the year ended
30 September 2012, the accumulated depreciation was RM8 million (RM20 million/5 years x
2). Therefore, by adopting an eight-year life, Line Berhad can avoid a depreciation charge in
the current year and instead credit RM05 million (RM8 million RM75 million) to the
income statement in the current year to improve the reported profit.
Instructions:
i.

Evaluate the above case using case study matrix and in compliance with MFRS108:
Accounting policies, changes in accounting estimates and errors and other relevant MFRSs.

ii.

Comment on the acceptability of the assistant accountants suggestions and quantify how
they would affect the financial statements if they were implemented under MFRS. Ignore
taxation.

b. The directors of Line Berhad are disappointed by the draft profit for the year ended 30
September 2013. The companys assistant accountant has suggested the area where she
believes the reported profit may be improved:
Most of Line Berhads competitors value their inventory using the average cost (AVCO) basis,
whereas Line Berhad uses the fi rst in fi rst out (FIFO) basis. The value of Line Berhads

inventory at 30 September 2013 (on the FIFO basis) is RM20 million, however on the AVCO
basis it would be valued at RM18 million. By adopting the same method (AVCO) as its
competitors, the assistant accountant says the company would improve its profit for the year
ended 30 September 2013 by RM2 million. Line Berhads inventory at 30 September 2012
was reported as RM15 million, however on the AVCO basis it would have been reported as
RM134 million.
INSTRUCTIONS:
i.

Evaluate the above case using case study matrix and in compliance with MFRS108:
Accounting policies, changes in accounting estimates and errors and other relevant MFRSs.

ii.

Comment on the acceptability of the assistant accountants suggestion and quantify how they
would affect the financial statements if they were implemented under MFRS. Ignore
taxation.
QUESTION 3

a.

FlyHigh Berhad acquired an airline route authority between Malaysia and Timbuktu which
expires in 3 years. The route authority may be renewed every 10 years, and FlyHigh Berhad
intends to comply with the applicable rules and regulations surrounding renewal. Route
authority renewals are routinely granted at a minimal cost and historically have been
renewed when the airline has complied with the applicable rules and regulations. FlyHigh
Berhad expects to service the route indefinitely. As the route authority is an identifiable nonmonetary asset without physical substance, FlyHigh Berhad has recognized the route
authority as an intangible asset.
Instruction:
i.

Evaluate the above case using case study matrix and in compliance with MFRS138:
Intangible Assets and other relevant MFRSs.

ii. How should FlyHigh Berhad treat this intangible asset in its financial statements and
what is its subsequent measurement?
b.

Big Market Berhad has decided to enter the retail market to sell ice cream in kiosks to be set
up in the vaLineus private universities throughout the Klang Valley. It recently purchased
two ice cream brands. Creamer has been in existence for many years and has a good
reputation for taste and quality. Icy has only been in the market for a short time and is
being marketed as being a healthier option. Big Market Berhad finds it difficult to estimate
the useful lives of the two brands and therefore intends to treat the brands as having
indefinite lives.
INSTRUCTIONS:

i. Evaluate the above case using case study matrix and in compliance with MFRS138:
Intangible Assets and other relevant MFRSs.
ii. Explain to Big Market Berhad how the acquisition of the brands should be treated in
accordance with the relevant financial reporting standards.