Question

(15 Marks) QUESTION 3 The following is an independent events and transactions o০০০০০ LPQ Berhad makes a provision for doubtful debts on 10% of all its trade receivables on 31 December 2019. On 21 February 2019, a customer who owed the entity RM1.5 million was declared as bankrupt a) (3 marks) Soo০০0 YMS Berhad has profit sharing plan to pay its employees 3% of its profit before tac (before profit-sharing bonus) if it exceeds RM100million. On completing the preparation of financial statement, the profit before tax is RM240 million. b) (3 marks) KLM Berhad signed a contract o acquire a factory building on 12 January 2019. The estimated cost of the building was RM20 million. c) (3 marks) Jaya Hana Berhad decided to celosed down one of its operation on 15 January 2019 () which was identified as a separate operation from the rest of the entity's business. (3 marks) Closing inventory was determined at as RM800,000 based on cost as at 31 December e) 2018. Part of the inventory of RM450,000 was damaged but the entity expected the cost of goods sold to be sold above cost. However, these goods was sold on 20 January 2019 for RM400,000. (3 marks) Required: Indicate if the following events or transactions are adjusting or non-adjusting items based on MFRS 110 Events after Reporting Period. If they are adjusting items, discuss the effect on the financial statement. The financial year end was 31 December 2018 and the account were authorized for issue on 31 March 2019. END OF QUESTIONS ***

Answer 1

a. This is an adjusting item

as it affects the recoverability of debts , as well as loss on that account,of the period being reported.

As things stand at the end of Dec 31, 2018,

provision would have been made on this customer for RM 1.5 mln.*10%=0.15 mln. Or RM 150000 only

where as , as on Feb 21, 2019 , there has arisen an additional loss of 1.5-0.15= RM 1.35 mln. --to be fully written off(that too before the authorised- for- issue date of Mar 31, 2019)

So, the additional ,loss need to be recognised.

The effect of this adjusting entry will be

Debit Bad debts expense(1.5-0.15)= 1.35 m----- income will reduce by 1.35 m

Debit Provn. For Doubtful debts 0.15 mln (already provided)

Credit Accounts receivable    1.5 ln.

b.This is an adjusting item

as there was already a profit-sharing plan agreed & existing , it needs to be honored , as per plan, ie. In the event of profits before tax exceeding RM 100 mlns.

The expense head need to be matched with the relevant year's profits

The effect of this adjusting entry will be

Debit Profit-sharing bonus(240*3%) 7.2 mln.---Income will reduce

Income summary --7.2 mln.

c.This is a non- adjusting item

This in, no way , will affect the financial state of affairs of the period(Dec.31,2018) being reported.

But a disclosure as foot notes is essential as the contract had been signed (Jan 12, 2019), ie. Before the authorised- for- issue date of Mar 31, 2019

d.This is also a non- adjusting item

This in, no way , will affect the financial state of affairs of the period(Dec.31,2018) being reported.

But a disclosure as foot notes is essential as the closing down date is Jan 15, 2019, ie. Before the authorised- for- issue of a/cs date of Mar 31, 2019

e.This is an adjusting item

as the sale (realisable)value of the damaged goods pertain to the inventory as at Dec 31, 2018

The closing inventory were sold before the authorised- for- issue of a/cs date of Mar 31, 2019

so, the impairment in its value , belongs to the reporting period, ie. Fiscal ending Dec 31, 2018

The effect of this adjusting entry will be

the closing inventory will be recorded at the lesser of the cost (450000)or net realisable value(400000)

ie. 400000

& so , the profits of Dec 31, 2018 will increase by(450000-400000)= 50000