Question

Question 1

Describe what it means to capitalise an expenditure. What is the general rule for determining which costs are capitalized when property, plant and equipment is acquired?   

Question 2

Mangkuk Tingkat Inc. adopts a revaluation model for their property, plant and equipment measurement. They have two properties in Kuala Lumpur as shown below with their costs and fair value for the year ended.

	Freehold Land in Bangsar RM ‘000	Leasehold Building Land in Cheras RM ‘000
Cost as at 31 December 2016	11,000	13,100
Fair value as at 31 December 2016	11,200	11,800
Fair value as at 31 December 2017	10,000	12,200

The leasehold building was acquired in 2010 and has a 2 percent depreciation rate per annum.

On September 2017, Mangkuk Tingkat Inc. exchanged equipment with Paku Besi Co. Paku Besi paid Mangkuk Tingkat RM5,000 in cash for the exchange. The information on the exchange are as follows:

	Mangkuk Tingkat Inc.	Paku Besi Co.
Original cost	RM 120,000	RM 140,000
Accumulated depreciation	55,000	63,000
Fair value	75,000	70,000

The exchange has commercial substance for both companies.   

Required:

a) Show the relevant journal entries to record the adjustments required on the revaluation for the year ended 31 December 2016 and 2017.   

b) Show the extract of Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2016 and 2017.   

c) Record the exchange for Mangkuk Tingkat Inc. and Paku Besi Co.

Answer 1

Answer:-

Expenditure can be a revenue expenditure or capital expenditure. Revenue expenditure is directly written off in the period in which it is incurred and is shown in the P&L however the capital expenditures are not directly written off and added to the cost of an assets and they are shown in the Balance sheet.

The below rules are always used to determine whether the expenditure is to be capitalized

• Expenditure that will give benefits for more than one accounting period
• Expenditure amount is such that the current P&L cannot absorb.
• The expenditure is incurred at the time of purchase of the asset.
• The expenditure is directly required to make the assets put to use.
• The expenditure exceeds the limit for an expenditure

Below entries are to be recorded to value the assets at FMV.

Freehold Land in Bangsar dr 200

   To Appreciation in value of asset.   200

(Being the asset is now revalued at 11200)

Depreciation in value of assets DR    1300

    To Leasehold Building Land in Cheras       1300

(Being the asset now loses the value and is now revalued at 11800)

Entries that are required to be passed at the time of exchange

Equipment purchased from Paku dr      77000

To cash                                                                         5000

To Equipment of Mangkuk                                            65000

To profit on sale of asset                                                7000

(Being the asset of another company is purchased at less price from the current value)

The equipment value of mangkuk is valued as below.

Orginal cost 120000-Depreciation 55000===65000

Equipment value of Paku 140000-63000==77000