Question
Dressvy Bhd is a manufacturer and supplier of men and women clothes. It operates in one district in northern area of Malaysia. The factory contains
Dressvy Bhd is a manufacturer and supplier of men and women clothes. It operates in one district in northern area of Malaysia. The factory contains a large amount of equipment that is used in the manufacture of clothes. The company owns both the factory and the land on which the factory stands. The land was acquired in 2008 for RM500,000 and the factory was built in that year at a cost of RM950,000. Both assets are recorded at cost, with the factory having a carrying amount at 31 December 2019 of RM450,000.
In recent years, there has been a property boom in that district with residential houses prices doubling such that the average price of a house is approximately RM800,000. A recent valuation of the land on which the factory stands as performed by a property valuation group and based on recent sales of land in the area has the land at a value of RM1.2 million. The land is now considered prime residential property given its closeness to the city and, with its superb sea views, its suitability for building service apartments. It would cost RM220,000 to demolish the factory to make way for these apartments to be built. It is estimated that to build a new factory on the current site would cost around RM1.5 million.
Dressvy Bhd also owns two special machines that are used it the manufacturing of the garments. These machines were ordered from a company in Europe. In measuring the fair value of these machines, the board of the directors of Dressvy Bhd was advised by the company accountant to base on the data gathered from the principal market in which the machines are traded. Recent survey carried out by the company indicates that the same type of machine are sold in three different active markets that are located in China, Russia and Poland. Data gathered for the two markets are as follows:
| Market in China | Market in Russia | Market in Poland |
Volume (annual) | 3,000 | 4,090 | 4,300 |
Trades (per month) | 14 | 15 | 17 |
Price (per unit) | 25,000 (in RM) | 26,100 (in RM) | 28,000 (in RM) |
Transportation costs (per unit) | 1,500 (in RM) | 2,300 (in RM) | 2,500 (in RM) |
Transaction costs (per unit) | 700 (in RM) | 1,200 (in RM) | 2,000 (in RM) |
However, due to a new trade policy enforces by Poland government, the market in that country is not accessible for uncertain period of time. Some of the directors then suggest that they should refer to the data from market in Russia in determining the fair value of the special machines as it has the second highest volume and level of activity after market in Poland.
Required:
- Determine the principal market and the most advantageous market for the special machines. Price in which market that shall be referred to in determining the fair value of the special machines. Justify your answer.
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