Question

QUESTION 3

On 1 January 2018, MM Bhd acquired a fast food franchise for RM300,000. The legal life of the franchise is seven (7) years while the economic useful life is six (6) years. On 31 December 2018, the franchise was revalued at RM340,000. Due to the outbreak of the COVID-19 at the end of year 2019, sale of fast food from the franchise is declining. Impairment test conducted showed that the fair value of the franchise was RM250,000. At this date the current trend of the outbreak indicates further sale declining in the next six (6) months. The company adopts the revaluation model to record the franchise.

The company also has legal title to a soft drink brand which was acquired on 1 January 2019 at RM350,000. The brand product is expected to generate cash inflow indefintitely. However, there is no active market available for this type of soft drink. On 31 December 2019, impairment test conducted showed the recoverable amount of the brand was RM310,000.

Financial year end for the company is 31 December.

REQUIRED:

1. Prepare journal entries to record the accounting treatment related to the franchise of MM Bhd on 31 December 2018 and 31 December 2019.
2. Explain the accounting treatment for the soft drink brand of MM Bhd on 31 December 2019.

Answer 1

Answer:-

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(a) Journal entries in the books of MMBhd:

Working note:

1. Upward revaluation in 2018 = Fair value at year end - Carrying amount

                                                      = RM340,000 - RM300,000

                                                      = RM40,000

2. Downward revaluation in 2019 = Carrying amount - fair value at year end

                                                            = RM340,000 - RM250,000

                                                            = RM90,000

Note: Revaluation of franchise is done at the end of every year. Franchise has been revalued through Revaluation Surplus-franchise right as company has adopted revaluation model to record the franchise. Thus, franchise shall be recorded at its fair value at every year end. However amortization of franchise shall be done according to its life as straight line method if company would have adopted Amortized Cost Method (ACM).

(b) Company owns a patent of soft drink brand. Life of patent is indefinite. Thus amortization of patent is not required if company records such patent at ACM.

If company adopted revaluation model then revaluation of such patent shall be done through Revaluation reserve. In this model patent shall be revalued at every year end on its fair value. In given question fair value (i.e. amount recoverable).

Journal Entry (in case of revaluation model is opted for such patent instead of ACM)

Note: Downward revaluation = Carrying amount - fair value at year end

                                                    = RM350,000 - RM310,000

                                                    = RM40,000