Question

Atif Pharma Bhd (AP Bhd) is a pharmaceutical distributor which purchases prescription medicines and other medical products directly from pharmaceutical manufacturers and distribute across the country. In 2019, the company was involved in several transactions related to the acquisition of property, plant and equipment in order to diversify its operation.

On 2 January 2019, the company purchased a land with an old building for the purpose of self–constructed a new building as a factory by a selected constructed contractor. The price of the land and old building were RM850,000 and RM150,000, respectively. Additional expenditure incurred in relation to the purchase of land and construction of new factory were as follows:

	RM
Professional fees	80,000
Commission paid to real estate agency	16,500
Cost of demolishing an old building on the land	20,000
Excavation cost	33,000
Salvage value from the old building	18,200
Cost of grading and clearing the plot	25,000
Installation of high grade fences around the factory	31,200
Cost of 200 parking lot and 4 driveways	83,000
Cost of direct material and direct labour for construction of factory	438,000
Overhead cost incurred during construction of factory	80,300
Cost of constructing and demolishing living quarters for the workers building a factory	22,200
Interest cost incurred to finance the construction of factory	23,790
Cost of planted a temporary green landscape	18,700

Including in the professional fees was legal fees for the land purchased totalled of RM35,000 and architect’s fee for the factory was of RM45,000. The construction of the factory completed on July 2019. But during the construction, the division manager had specified a low quality of direct material which caused the cost of inefficiency of RM25,000. This cost has been included in the cost of direct material and direct labour.

On 1 July 2019, AP Bhd purchased a specialised machinery for medicine repackaging and laboratories operation that will be used in a new factory. There is no market for this type of machinery in Malaysia, therefore AP Bhd spent of RM20,000 for oversea trip to search for this machinery. The list price of the machinery was RM4,500,000 with a trade discount of 1%. The shipping and handling cost to bring the machinery to the factory was RM180,000. Insurance cost during the shipping was RM30,700. This machinery need a special treatment for the specified area, therefore the company has incurred a cost of RM50,000 for concrete reinforcement; and electrical cabling and wiring totalled of RM33,000 for site preparation. While the Installation and assembly cost was RM42,900. Cost of maintenance of this machinery for three years was RM10,000.  

In addition, AP Bhd has an old equipment. However, this old equipment cannot be used in a new factory since a new factory is made for specified medicine regarding Immunologist while the old machine used for Anesthesiologists. Therefore, on 19 August 2019, AP Bhd decided to exchange its old equipment plus cash for a new equipment from another company. The old equipment was bought on 1 Jun 2015 for RM1,500,000. The old equipment has useful life of 20 years and the company uses straight line method to calculate for depreciation. This old equipment has a market value of RM1,458,000 at the time of trade in. The new equipment has a market value of RM1,420,000. This transaction has a commercial substance.

On 31 August 2019, AP Bhd purchased a furniture for a new factory with a fair value of RM1,200,000 by issuing 60,000 unit of ordinary share. The market value of the share is RM2.50 per unit.

On 30 September 2019, AP Bhd has launched an opening of new factory by inviting the Minister of Health as it becoming the third bumiputera factory and company in pharmaceutical in country. This grand ceremony involved additional cost of RM30,000. On 10 November 2019, AP Bhd entered into contract to acquire the franchise of multivitamin products. AP Bhd paid an amount of RM1,250,000 to the franchisor to produce and sell the product using the formula given by franchisor.

REQUIRED:

2. Prepare the journal entries to record the acquisition of machinery, equipment, furniture and franchise in accordance to MFRS 116 Property, Plant and Equipment and MFRS 138 Intangible Assets. Please show details calculations for each item.

Answer 1

Date	General Ledger	Debit	Credit	Working
1/1/2019	Machinery A/c---Dr	4,811,600		4,500,000*99% + Shipping + search + insurance+ concrete+cabling
	To Bank A/c		4,811,600
19/8/19	Equipment A/c---Dr	1,420,000
	To Bank A/c		1,420,000
31/8/19	Furniture A/c---Dr	1,200,000
	To Equity Share Capital A/c		60,000	Assumed 1 face value
	To Additional Paid In capital A/c		1,140,000	Difference between 12,00,000-60,000
10/11/2019	Franchise A/c----Dr	1,250,000
	To Bank A/c		1,250,000

MFRS 116 provides that any cost incured to acquire, develop and bring a machine to its present condition can be capitalised. Accordingy, cost of grande ceremony and franchice are not capitalised as they do not relate to bring plant to its present condition. Also, cost of day to day servincing is not allowed to be capitalised and hence not considered for capitalisation.

MFRS 138- Intangible assets , para 9 provides that Entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights. hence, Franchise has been capitalised