MFRS123 tutorial questions - sept 2019-Jan 2020 PDF

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MFRS123 BORROWING COSTSQUESTION 1On July 20x6 FZ Bhd started constructing a manufacturing company that expected to have a useful life of 20 years with no residual value. The estimated total cost of construction were RM 25 million and to be completed on June 20x8. To finance the project 5-year long-t...

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Tutorial MFRS123 Semester Sept 2018

MFRS123 BORROWING COSTS QUESTION 1 On July 20x6 FZ Bhd started constructing a manufacturing company that expected to have a useful life of 20 years with no residual value. The estimated total cost of construction were RM 25 million and to be completed on June 20x8. To finance the project 5-year long-term loan of RM10 million is obtained on 1st May 20x6 with interest rate of 8% per annum. The total construction cost for the year is RM10 million. On Jan 20x7 FZ Bhd suspended the construction plant due to shortage of material. The reconstruction recommenced back on 1 March 20x7 and was finally back on schedule. The total cost construction were RM10 million in the year of 20x7 On 30 June 20x8 the construction completed as per schedule. The total cost construction were RM5 million in the year of 20x8. It is the company policy to capitalise borrowing costs that are directly attributable to the acquisition ,construction or production of a qualifying asset where possible. Required: i. ii. iii.

Calculate the borrowing cost for the years ended 31 Dec 20x6,20x7 and 20x8. Prepare journal entries the years ended 31 Dec 20x6,20x7 and 20x8 Prepare SOP/L&OCI for the year ended 31 December 20x6,x7,x8 SOFP as at that date.

SOLUTION 1 Total borrowing costs incurred

Borrowing costs eligible for capitalisation

20x6

= RM533,333 (RM10 mill x 8% x 8/12

= RM 0.4 mill (RM533,333 x 6/8)

Borrowing costs treated as expense in the income statement = RM 133,333 (RM533,333RM0.4 mill)

20x7

= RM0.8 mill (RM10 mill x 8% x 12/12)

= RM 666,667 (RM0.8 mill x 10/12)

= RM 133,333 (RM0.8 millRM667,667)

20x8

= RM0.8 mill (RM10 mill x 8% x 12/12)

= RM 0.4 mill (RM0.8 mill x 6/12)

= RM 0.4 mill (RM0.8 millRM0.4 mill)

Date 1/5/x6

31/12/x6

Cash-asset Bank loan-liability (Loan taken) Asset under construction-asset Interest expense-p/l Cash/payable (Borrowing cost capitalized and expensed) Asset under construction-asset Cash/payable (Construction cost incurred)

31/12/x7

Asset under construction

Debit (RM) 10,000,000

Credit (RM) 10,000,000

400,000 133,333 533,333

10,000,000 10,000,000

666,667

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Tutorial MFRS123 Semester Sept 2018

Interest expense-p/l Cash/payable (Borrowing cost capitalized and expensed)

133,333 766,667

Asset under construction Cash/payable (Construction cost incurred) 30/6/x8 31/12/x8

30/6/x8

30/6/x8

10,000,000 10,000,000

Asset under construction Interest expense-p/l Cash/payable (Borrowing cost capitalized and expensed)

400,000 400,000 800,000

Asset under construction Cash/payable (Construction cost incurred)

5,000,000 10,000,000

Plant 26,466.667 Asset under construction (Asset under construction completed and reclassify as plant) Depreciation expense Accumulated depreciation-plant 26466,667/ 20 yrs x 6/12

661,667 667,667

(from 1/7x831/12/x8)

Statement of Profit and Loss Account for the year ended 31 Dec

EXPENSES Finance cost Depreciation expenses (26,466,667/20x6/12)

20x6

20x7

20x8

133,333

133,333

400,000

-

-

661,667

20x7

20x8

10400,000 21066,667

-

Statement of Financial Position for the year ended 31 Dec 2006 Non-current assets Asset under construction

20x6

Plant

-

-

26,466,667

Accumulated depreciation

-

-

(661,667)

QUESTION 2 Adam Berhad started the construction of a factory on 1 August 20x2 that is expected to take 5 years to complete. It is being financed entirely by a five-year term loan of RM10 million which was taken out at the start of the construction. The loan carries a fixed interest rate of 8% per annum and the company incurred issue costs of 3% of the loan value. At the start of the borrowing period, RM3 million of the total loan were invested in one year fixed deposit account which yields an interest income of 6% per annum. The issue costs incurred are written off on a straight line basis over the term of the loan. The total construction costs is estimated to be RM10 million.

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Tutorial MFRS123 Semester Sept 2018

Required: i.

Calculate the initial cost of the factory upon its completion assuming that costs remain as expected.

ii. calculate the amount of borrowing costs that could be capitalized for the construction of the factory for the year ended 31 December 20x2. Solution i.

Initial cost of the factory:

Construction cost Total borrowing cost (RM10m x 8% x 5 years) Return on investments (3m x 10%) Total cost

RM 10,000,000 4,000,000 (180,000) 13,820,000

ii. Amount of borrowing costs to be capitalised for the year ended 31 December 20x2:

Borrowing costs (RM10m x 8% x 5/12) Return on investment (RM3m x 6% x 5/12) Amount capitalised during the year

RM 333,333 (75,000) 258,333

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Tutorial MFRS123 Semester Sept 2018

QUESTION 3 The policy of Red Bhd in relation to borrowing cost for the purpose of `qualifying asset’ is to capitalize it in accordance to MFRS123 Borrowing Costs. With the company’s expansion, Red Bhd decided to construct another production plant in addition to the existing plant. To finance partly the construction cost which is estimated to be RM3,000,000 the company took up a loan with ABC Bank for RM2,300,000 on 1 April 20x3. It is a ten-year term loan. The loan carried an effective interest rate of 8%. On 1 October 20x3, the company invested 25% of the loan value in a 6 months investment earning interest at 10% per annum. Construction only begins on 1 July 20x3 after all the necessary approvals was completed. During the year 20x4, an accident happened in the construction site and construction was suspended from 1 October to 31 December. The building was completed on 31 March 20x5. Required: i. Explain the term `qualifying asset’ in relation to MFRS123 Borrowing Costs. examples of borrowing costs.

Give

ii.

Calculate the amount of borrowing costs expensed and the amount that should be capitalized for the accounting year ended 31 December 20x3.

iii.

Determine the initial cost of construction. (Show all computations)

iv.

Show the relevant journal entries to record the transactions on 31 March 20x5.

QUESTION 4 On 1 October 20x1, TP Bhd obtained a 3 year-term loan of RM9,000,000 from CIMB Bank to finance a construction of new office building. The loan carried an interest rate of 8% per annum and the construction work will take approximately 30 months to complete. However the construction work of the new office building was only commenced on 1 January 20x2. Since the company is not going to utilize the full amount of the loan in the first year of construction, it deposited RM4,000,000 in a 12 -months-fixed deposit which yielded an interest of 6% per annum. On 1 February 20x3 the construction site faced shortage of manpower and the construction has to be suspended for 2 months before the company can resolve the problem. The office building was finally completed on 31 May 20x4 and brought into used after it was launched on 1 September 20x4. Construction costs (excluding interest) incurred on the building was RM8,250,000. Required: a. Explain the meaning of “qualifying asset” in accordance to MFRS 123 Borrowing Costs. Briefly explain the circumstances when borrowing costs can be capitalized. b. Discuss the accounting treatment of the borrowing cost for the accounting year ended 30 September 20x2. c. Calculate the amount of borrowing costs expensed and the amount that should be capitalized for the accounting year ended 30 September 20x3 and 20x4. d. Determine the initial cost of the new office building.

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Tutorial MFRS123 Semester Sept 2018

QUESTION 5 DM Bhd applied for a loan of RM11,000,000 from Bank Islam Malaysia Berhad on 1 June 20x1 to begin the construction of a manufacturing plant costing RM12,000,000. Estimated useful life of the plant is 10 years with zero salvage value. On 1 July 20x1, the bank approved RM9,000,000 loan which carried an interest rate of 7% per annum and issue cost of 2% of the face value of the loan. On 1 September 20x1, the construction of a manufacturing plant began. On 1 August 20x1, DM Bhd invested 50% of the loan in a 9month investment earning interest of 5% per annum. Construction of the plant was temporarily suspended from 1 November 20x2 due to technical problem. On 1 February 20x3, construction work recommenced and completed on 31 October 20x3. Required: a. Explain the requirements of MFRS 123 Borrowing Costs relating to the commencement, suspension and cessation of capitalization of borrowing costs in DM Bhd. b. Calculate the amount of borrowing costs expensed and the amount that is eligible for capitalization for the years ended 31 December 20x1 and 20x2. c. Determine the initial cost of the manufacturing plant on 31 October 20x3.

QUESTION 6 MX Berhad has the policy of capitalising borrowing costs in relation to construction of a “qualifying asset” in accordance with MFRS 123 Borrowing Costs. On 1 July 20x1, MX Berhad commenced construction of a manufacturing plant that was expected to take three years to complete. In order to finance part of the construction cost, MX Berhad took a three year term loan of RM100 million at an effective interest rate of 10% per annum on 1 October 20x1. During the year 20x2, RM70,000 had been earned from the temporary investment of this borrowing. There was no construction during the month of October to December 20x3 due to the shortage of steel. The construction of the manufacturing plant was completed on 30 June 20x4. Financial year end is 31 December. Required: a. Calculate the total amount of borrowing costs that could be capitalised in respect of the above qualifying asset. b. Explain the meaning of “qualifying asset” in accordance with MFRS 123 Borrowing costs. c. Briefly explain the circumstances when the borrowing cost can be capitalised in accordance with MFRS 123 Borrowing costs. QUESTION 7 On 1 October 20x1, NX Bhd acquired a warehouse building at the fair value of RM8,000,000 with an estimated useful life of 10 years. The company received a government grant of 20% of the fair value at the time of its acquisition.

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Tutorial MFRS123 Semester Sept 2018

In June 20x5, the building underwent reconstruction. The reconstruction was estimated to cost RM2,000,000 and scheduled to be completed on 30 June 20x7. The reconstruction would extend the life of the building by another 5 years. In order to finance the reconstruction, the company took a 10% 3-year term loan of RM1,500,000 on 1 August 20x5. In early 20x6, the company invested a quarter of the loan amount in a 3- month fixed deposit at Hong Leong Bank earning a return of 1% per month. NX Bhd faced problems in acquiring building materials in 20x7 and the reconstruction progress was interrupted for 4 months before it was finally completed as scheduled. NX Bhd uses straight-line depreciation based on ownership of the warehouse building. In accounting for government grants received, the company has adopted the deduction against asset method. Required: a. With reference to the revised MFRS 123 Borrowing Costs, explain the accounting treatment of the borrowing costs of the funds used to finance the reconstruction of the warehouse building. b. What is the total amount of borrowing cost capitalized? c. State the carrying amount of the warehouse building as at 30 June 20x7 reconstruction is completed. Show the necessary workings.

when

Solution a. Borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets shall be capitalized and included as part of the cost of these assets. b. Amount of borrowing cost capitalized: Interest on loan – RM1,500,000 x 10% x 19/12 Less: Return on investment – RM375,000 x 1% x 3 Amount of borrowing cost capitalized

RM 237,500 (11,250) 226,250

c. Carrying value of the warehouse building as at 30 June 2011: Cost as at 1 October 2005 (8,000,000 – 1,600,000) Accumulated depreciation as at 30 June 2011: RM640,000 x 5.75 years Carrying amount as at 30 June 2011 Reconstruction cost Borrowing cost

RM 6,400,000 3,680,000 2,720,000 2,000,000 226,250 4,946,250

QUESTION 8 On 1 April 20X1, MY Bhd. commenced construction of a manufacturing plant costing RM5 million. Estimated useful life of the plant is 20 years with zero salvage value. The construction is expected to be completed in August 2010. To finance the construction, MY Bhd. applied for a loan from CIMB Bank and on 5 March 20X1, the bank approved RM5 million loan which carries an interest rate of 12% per annum and issue costs of 2% of the face value of the loan. During the year 20X1, MY Bhd invested RM1.8 million of the loan in a short-term investment, earning interests of 8% per annum. 6

Tutorial MFRS123 Semester Sept 2018

Construction of the plant was temporarily suspended from 1 October 20X2 due to technical problems. On 2 January 20X3, construction work recommenced and was finally completed according to schedule. MY Bhd has the policy of capitalising borrowing costs in relation to “qualifying assets” in accordance with MFRS 123 Borrowing Costs. Required: a. With reference to MFRS 123, explain the accounting treatment of the borrowing costs of the funds used to finance the construction of the manufacturing plant. b. Calculate the amount of borrowing costs that can be capitalised and expensed for the years 20x1, 20x2 and 20x3. Show all workings. c. State the situations when the company should cease capitalisation of borrowing costs. Solution a. In accordance with MFRS 123, the borrowing costs of the funds used to finance the construction of the manufacturing plant should be capitalised and included as part of the costs of the assets provided that the manufacturing plant qualifies as a qualifying asset. b.

20x1

Interest on loan RM5m x 12% x 10/12 Investment return RM1.8m x 8% x 10/12

Incurred RM 500,000

Capitalised Expense RM RM 450,000 50,000

(120,000)

(108,000)

380,000

342,000

50,000

20x2

Interest on loan RM5m x 12% x 1 year

600,000

450,000 (9 months)

150,000

20x3

Interest on loan RM5m x 12% x 1 year

600,000

400,000 (8 months)

200,000

c. The company should ceased capitalisation of borrowing costs when: i. Development activities are interrupted or suspended, or ii. All activities necessary to prepare the qualifying asset for its intended use or sale are complete.

QUESTION 9 On 1 January 20x1, LJ Bhd constructed a new building which was financed entirely by RM10 million from AM Bank at an interest rate of 7.5% per annum. The loan was specifically secured to finance the construction of the building. The new building will be used as an investment property. Construction of the building commenced on 1 March 20x1 and it was completed on 1 February 20x3, but only ready for use as an investment property on 1 March 20x3. The fair

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Tutorial MFRS123 Semester Sept 2018

value of the building was RM14 million on 1 March 20x3 and there was no significant change in the fair value as at 31 December 20x3. Total construction costs incurred excluding any capitalised borrowing costs were RM10 million. Of this amount, RM3 million was incurred in 20x3. During the year ended 31 December 20x1, LJ Bhd suspended the construction of the new building for a two-month period during May and June 20x1. The proceeds from the loan were temporarily invested for the month of April and May 20x3, earning an interests of RM40,000. LJh Bhd adopted the fair value model to measure its investment property and property, plant and equipment. Property is being depreciated at 5% per annum on a straight line basis. Required: i.

Based on the information in LJ Bhd, explain the circumstances when borrowing costs can be capitalised in accordance to MFRS 123 Borrowing Costs.

ii. Calculate the total amount of borrowing costs that could be capitalised as part of the cost of the building. State the amount of finance cost that should be expensed to the income statement for the year ended 31 December 20x3. Solution i.

Where borrowing costs are incurred on a ‘qualifying asset’, it can be capitalised as part of the cost of that asset. A qualifying asset is a tangible or an intangible asset that takes a substantial period of time to get ready for its intended use or eventual sale. Hence, borrowing costs could be capitalised during property construction. For LJ Bhd, capitalisation should commence on 1 March 20x1 when expenditure is being incurred on the construction of the building. Capitalisation should be suspended on May and June 20x1 where there was a suspension of active development of the building. The borrowing costs that are not eligible for capitalisation must be expensed off to SOP/L. Capitalisation of borrowing cost will continue until the construction was completed. Capitalisation should cease on 1 February 20x3 when the asset is ready for its intended use, even though the funds may still be incurring borrowing costs. The income earned from the temporary investment amounting RM40,000 is charged as income to the SOP/L since the investment was invested after the construction completed.

ii. Total amount of borrowing costs that could be capitalised: 20x1: RM10m x 7.5% x 8/12 20x2: RM10 m x 7.5% x 1 year 20x3: RM10m x 7.5% x 1/12 Total = RM1,312,500

= RM500,000 = RM750,000 = RM62,500

Therefore, the amount expensed to SOP/L for the year ended 31 December 20x3 = RM10m x 11/12 = RM687,500

QUESTION 10 a.

Explain the accounting treatment of borrowing costs if the borrowings are specific to the acquisition of a qualifying asset.

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Tutorial MFRS123 Semester Sept 2018

b.

On 2 January 20x2, N Bhd, a ship manufacturer, started to construct a ship which would take two years to complete. To finance the project, N Bhd borrowed RM300,000 and RM200,000 from the bank on 2 January 20x2 and 1 July 20x2 respectively. Interest rates were chargeable at 10% per annum and 12% per annum respectively. The following is an extract from the statement of financial position of N Bhd as at 31 December 20x1 20x2 RM RM 8% debentures 500,000 500,000 10% loan stock 100,000 100,000 10% bank loan 300,000 12% bank loan 200,000 600,000 1,100,000 Expenditure incurred on the ship construction were RM200,000 on 2 January 20x2 and RM150,000 on 1 July 20x2. Required: Calculate the borrowing costs that may be capitalised for the year 20x2. (source : Roshayani, pg81, financial acctg & reporting in Malaysia))

c.

On 1 January 20x1, Faiz Bhd secured an 8% long-term loan of RM10 million to fully finance the construction of an office building. Construction will be completed on 31 December 20x2. Faiz made a temporary investment which provided an interest income of RM200,000. Required: Calculate the borrowing cost which shall be capitalized.

Solution a.

If the borrowings are specific to the acquisition of a qualifying asset, the amount of borrowing costs eligible for capitalisation...