Question

Super Man is a trading company with financial year ending every 31 December. The company is preparing their financial statements for the year ending 31 December 2018 and the following is Super Man’s Trial Balance as at that date.

Super Man Trial Balance as at 31 December 2018 ('000)

Property, plant and equipment 65,520 (DEBIT)

Accumulated depreciation 7,520 (CREDIT)

Intangible asset 3,780 (DEBIT)

Inventories – 1 January 2018 81,970 (DEBIT)

Other Short-term Investments 2,760 (DEBIT)

Trade Receivables 66,320 (DEBIT)

Cash and cash equivalents 34,650 (DEBIT)

Share capital 40,050 (CREDIT)

Retained earnings – 1 January 2018 82,332 (CREDIT)

Long-term loans 33,090 (CREDIT)

Short-term borrowings 46,090 (CREDIT)

Trade payables 51,310 (CREDIT)

Revenue 331,080 (CREDIT)

Allowance for doubtful debt 50 (CREDIT)

Purchase 229,472 (DEBIT)

Administrative expenses 34,360 (DEBIT)

Distribution expenses 64,350 (DEBIT)

Finance cost 3,630 (DEBIT)

Taxation expense 1,540 (DEBIT)

Rental income 3,170 (DEBIT)

TOTAL DEBIT: 591,522

TOTAL CREDIT: 591,522

Additional information:

a. Depreciation for the financial year ending 31 December 2018 for property, plant and equipment have been charged and included in the accumulated depreciation account in the trial balance.

b. The company received a grant worth RM6,000 on 15 December 2018. It was an incentive by the government for retraining a group of its employees. The three-month training started in December 2018 has a cost of RM10,000 a month. None of the transactions related to the above has been recorded.

c. Included in the long-term loans is a loan worth RM4,000,000 at 5% annual interest, granted by a local bank on 1 August 2018, for five-year period. Installment for the month of December 2018 has not been paid yet and the related interest for the installment was RM15,200. None of the transactions related to the above has been recorded.

d. The intangible asset was capitalized from the cost of research and development made by the company between 2016 and 2017, recognized in December 2017. The asset that resulted from the research and development process will last for 60 years and it is the company’s policy to amortize the intangible assets over 10 years. No record has been made in relation to the amortization for the financial year 2018.

e. The company is in the middle of a court case with Kinoyu Berhad. The company refused to accept a batch of goods delivered to it in January 2018 due to its misspecification. Consequently, Kinoyu Berhad is suing the company in August 2018 and asking for a compensation of RM3,000,000 for breaking their trade contract. At the end of December 2018, the lawyers that represent Super Man gives a 50-50 percent chance to win.

f. Stocktake as at 31 December 2018 revealed inventory cost amount of RM80,600,000. However, one batch of the inventory was damaged and need to be repackaged. The cost of repackaging was RM5,000 to enable it to be sold at RM110,000. The cost for the batch was RM100,000.

Question:

Show the necessary adjusting journal entries for the additional information above.

Answer 1

a)

No entry needed as Depreciation have been charged and included in the accumulated depreciation account by following entry ;

Depreciation Dr.

To Accumulated depreciation A/c

b)

1. Cash Dr. 6000

To Grant Rec 6000

(Being Grant received)

2. Training Exp Dr. 10000
To Cash 10000

(Being Training exp paid)

3. Grant Rec Dr. 2000
To Training Exp 2000

[6000*1 month/3 month]

(Being expense adjusted against Grant)

4. P&L Dr 2000
To Training Exp 2000

(Being balance expense recognized in P&L)

c)
1. Interest on Loan Dr. 15200
To Long Term Loan 15200

2. P&L Dr           15200
     
To Interest on Loan      15200
(Being balance expense recognized in P&L)

3. Long Term Loan Dr. 75485
To EMI Payable 75485
(Being EMI Payable booked as outstanding)
EMI for 5 year for RM4,000,000 at 5% annual interest based on EMI calcutaor= RM 75485

It is assumed Interest for previous month has been paid and recorded.

d)

It is Assumed that intangible Asset is capitalised in Year 2017 & Accordingly it has been amortized for the year 2017.
so if no amortization cost is recorded for 2018 then amortization cost can be calculated as follow -
= balance as on 3112/2017 /90 %
= 3780 /90
4200
so Amortization cost for 2018 = 4200 * 1/10 = 420

Journal Entry
Amortization cost..... dr. 420
To Intangible Asset.......... 420

e)

it is advisabbble to make a provision for the amount of compensation that company has to pay in case they loose the case for which probablity is 50 % .
so provision is to be made for the 50 % of the compensation amount .
= Provision amount = RM3,000,000 *50 %
= RM 1500000
Journal Entry
Profit & Loss A/c .... Dr 1500000
To Provision for contingent Liability 1500000
(Being provision created for contingent liabilty)

f)

Cost incurred for repackaging to be included in the cost of the stock .
Journal Entry -
Repackaging Cost A/c .... dr 5000
to Cash / Bank ..............5000
( Being exp incurred)

Stock A/c ...... dr 5000
To Repackging cost 5000
(Being cost Incurred for repackaging to be added to closing stock value.)