Kingdom Illusion Bhd was incorporated in Malaysia, involved in creating and distribution of digital games, and related products within the Malaysian market. The financial statement for the year 2020 was authorised for issue on 31 March 2021. Provided below is the company's trial balance for the year ended 31 December 2020: Credit RM Debit RM 1,700,000 1,450,000 600,000 20,000,000 5,000,000 3,000,000 500,000 1,000,000 600,000 150,000 20,000,000 3,000,000 1,500,000 300,000 4,693,500 Investments Investment properties Intangible asset Freehold land at revaluation Building at cost Machines and equipments at cost Motor vehicle Accumulated depreciation at 1 January 2020: Building Machines and equipments Motor vehicle Ordinary share capital 5% redeemable preference shares 10% bank loan Revaluation reserve (freehold land) Retained profits at 1 January 2020 Interim dividend paid: Redeemable preference dividend Ordinary dividend Investment income Accounts receivable Accounts payable Provision for legal claim Cash at bank Rent and other services income Sales Cost of sales Inventory at cost Administrative expenses Distribution expenses Interest paid on bank loan Tax paid 75,000 500,000 460,000 2,300,000 1,684,000 250,000 338,000 96,000 14,249,500 8,000,000 400,000 2,100,000 1,500,000 20,000 500,000 47,983,000 47,983,000 2 AC/GROUP PROJECT/FAR460 Additional Information: 1. Kingdom Illusion Berhad depreciates its non-current assets as follows: Building Machinery Motor vehicle 50 years, straight-line (yearly basis) 5% on cost (based on period of ownership) 10 years, straight-line (yearly basis) Depreciations for building and machinery are treated as administrative expenses while for motor vehicle, it is treated as distribution cost. On 1 January 2020, the freehold land was revalued to RM19,500,000 and building (at cost of RM5,000,000) was revalued to RM4,200,000. 2. 3. The company acquired a new machine on 1 January 2020 at a cost of RM500,000. This amount was already included in the financial statement. However, the shipping cost in transporting the equipment of RM10,000 was treated as part of administrative expense. 4. On 30 June 2020, one of the company's motor vehicles which were acquired on 1 March 2016 at RM150,000 was disposed for RM75,000 cash. The disposal has not yet been recognised by Kingdom Illusion Berhad. 5. Investment properties consist of the following: i. Kingdom Illusion Berhad acquired a building on 1 January 2019 at RM1,000,000. It has 20 smaller shop units that cannot be sold separately where 4 units were used as the company's showroom and maintenance room. All the remaining units were rented at a cheaper price (but equal to the average market price) as a strategy to attract more tenants. In addition, the company also provides utilities and amenities services including Wi-Fi services to the tenant as part of the rental package. The total rental package plus services charged to the tenants was RM8,000 monthly These facts were only made known to the company's accountant at the end of 2020. As such, he proposed for reclassification of this property to avoid non- compliance of MERSs. ii. Another building was acquired on 1 August 2020 for RM450,000 and was leased out under operating lease. The fair value of the building was RM480,000 as at 31 December 2020. The company adopts fair value model in measuring its investment properties. As at 31 December 2019 and 2020, the fair value of these properties were equal to the initial acquisition cost. 6. 40% of the intangible assets represent the development cost of a new computer game called Belasah. The cost was capitalised on 1 October 2020. However, on 27 December 2020, the authority revoked the approval given earlier with reason that the game has element of violence and not suitable for teenagers. As such, the company was unable to continue the product into commercial production. The remaining intangible assets was a patent acquired on 1 July 2020 that should be amortised over 10 years. 7. The 10% bank loan was taken up on 1 September 2020 to finance part of the operating cost. 3 AC/GROUP PROJECT/FAR460 8. In January 2021, it was discovered that one of the customers who owed RM300,000 was declared bankrupt and it is confirmed that only 25% of the amount will be recovered. 9. The followings have not been provided for the year: i. Auditors' fee of RM50,000, and ii. Final dividend on redeemable preference shares of RM75,000. 10. At 31 December 2020, the net realisable value of the closing inventory is RM360,000. 11. The tax expense for the year is estimated to be RM660,000. 12. On 1 February 2021, the board of directors declared additional ordinary dividend for 2020, an amount of RM750,000. It was unanimously agreed that the dividend will be paid in April 2021. 13. On 21 September 2020, ACE Arcade Centre sued Kingdom Illusion Berhad for damages. Kingdom Illusion Berhad cancelled the remaining one-year contract with ACE Arcade Centre to supply digital games to the centre and this has caused the company huge losses. Since the case was still on-going, Kingdom Illusion Berhad has recognised RM250,000 provision for legal claim in the financial statement. On 12 February 2021, the court ruled out that Kingdom Illusion Berhad to pay RM420,000 to ACE Arcade Centre for the damages caused. The amount includes RM20,000 legal fees payable to the legal representatives of ACE Arcade Centre. 4/6 4 4/6 AC/GROUP PROJECT/FAR460 Required: PART A The following requirements relates to the additional information above: a) Based on information (2), briefly explain the appropriate accounting treatment for the revaluation of the freehold land and building. b) Based on information (3), briefly discuss the suitable recognition and measurement of acquisition of the new machine on 1 January 2020. Based on information (5)(), comment on the reclassification of the property es proposed 5/ by the accountant. c) d) Based on information (6), explain the appropriate accounting treatment for the capitalization of the development cost. e) Based on information (8), identify the nature of transaction and explain the appropriate accounting treatment of the transaction. f) Based on information (12), which accounting standard is applicable and explain the appropriate accounting treatment. g) Based on information (13), which accounting standard is applicable and explain the appropriate accounting treatment. h) Prepare the journal entries incorporating the related adjustments in the additional information (1) until (13). (Total: 50 marks) (Note: Show all relevant workings where necessary) 5 AC/GROUP PROJECT/FAR460 PART B Prepare the following financial statements in a form suitable for publication and in compliance with the Companies Act 2020 (as amended) and Malaysian Financial Reporting Standards (MFRSs): a) Statement of Profit or Loss and other Comprehensive Income for the year ended 31 December 2020. b) Statement of Changes in Equity for the year ended 31 December 2020. c) Statement of Financial Position for the year ended 31 December 2020. d) Show notes to the property, plant and equipment. (40 marks) e) Based on the above financial statements, compute the following ratios: i. Profitability ratio 1. Gross Profit Margin 2. Net Profit Margin ii. Liquidity ratio 1. Current Ratio 2. Quick Ratio arl (Note: Show all necessary workings. Your answer should be in RM'000) 6/6 (Total: 50 marks)