Smiley Berhad is a publicly traded conglomerate headquartered in Butterworth, Penang that supply aerospace systems and engineering services. The company is the pioneer in the aerospace industry in Malaysia and also leader in designing, manufacturing and delivering aerospace products, services and solutions to customers on a global scale. The financial year of Smiley Berhad ends on 30 June each year. The directors authorized the financial statements for issue on 1 September 2019. Given below is the trial balance of the company based on the unadjusted accounts balances as at 30 June 2019. Smiley Berhad Trial Balance as at 30 June 2019 DR (RM) CR (RM) RM'000 RM'000 Revenues 468,080 Cost of sales 287,600 Inventory on 30 June 2019 21,000 Administrative expenses 33,300 Other income 2,000 Land at valuation - 1 July 2018 150,000 Investment property - Valuation 1 July 2018 30,000 Buildings at cost 48,000 Accumulated depreciation: Building - 1 July 2018 1,920 Plant at cost 52,000 Accumulated depreciation: Plant - 1 July 2018 10,400 Selling and distribution cost 30,000 Trade receivables 20,000 Allowance for impairment of trade receivables as at 1 July 2018 2,000 Bank & Cash 8,000 Trade payables 26,800 Ordinary share capital 50,000 Non-redeemable preference share capital 30,000 10% Debentures (issued on 1 July 2018) 20,000 Tax payable as at 1 July 2018 2,000 General reserves 27,100 Retained earnings - 1 July 2018 52,600 Intangible assets as at 1 July 2018 10,000 Accumulated amortization as at 1 July 2018 2,000 6% Bank loan (received on 1 July 2018) 4,000 Interim ordinary dividend paid 4,000 Interim non-redeemable preference dividend paid 3,000 Tax paid 2,000 698,900 698,900 Project 2 FAR270 3 Additional information: 1. The company's Financial Controller had highlighted the following matters involving the recognition of company revenues that need further clarification in the financial statements: i. The opening inventories has been overstated by RM3,000,000. ii. Administrative expenses included RM1,000,000 of customers list that was acquired by Smiley Berhad on 1 January 2019. iii. Excluded in the revenues figure was RM1,200,000 prepaid cash from Mega Asian Berhad for the goods to be delivered on 10 July 2019. The delivery was delayed due to special request by the customer. iv. On 25 June 2019, the internal auditor discovered fraudulent transactions made by a senior account manager and immediately lodged a police report. The company also dismissed him instantaneously. Cash receipts from customers totaling RM500,000 had been divested by him during the current year. v. On 1 July 2018, Smiley Berhad entered into a 12-month contract to supply cockpit instrumentation to Air Eagle Berhad, for a consideration of RM2,500,000. As stated in the contract, the company will also need to provide the technical support consisting of staff training and testing of the new equipment. The standalone price of the equipment and the technical support were RM2,000,000 and RM700,000 respectively. Air Eagle Berhad paid a non-refundable deposit of RM1,000,000 in advance. The balance of RM1,500,000 was payable only on delivery of the equipment. The equipment was delivered to Air Eagle Berhad on 30 May 2019. Staff training and testing were completed on 30 June 2019. 2. The following information is obtained from the accountant of Smiley Berhad pertinent to the valuation of the company's land, buildings, plant, investment property and equipment as at the financial year end: i. The directors decided to revalue the land in line with recent changes in market value. The land was revalued on 1 July 2018 at a fair value of RM155,000,000. On 30 June 2019, Smiley Berhad sold this land at a current value of RM159,000,000. ii. Buildings and plant are to be depreciated over a useful life of 50 years. Depreciation for the year which has to be treated as administrative costs has not been computed. iii. Smiley Berhad owns a shopping mall in Langkawi where various shops are let to tenants. The company provides cleaning, maintenance and security services for the mall. On 30 June 2019, the investment property was revalued at RM25,000,000. Project 2 FAR270 4 iv. As stipulated in a valuation report issued by Maz and Associate, a professional valuer firm, another company's investment property which is freehold premises that located in Sunshine Park, Bertam has a fair market value of RM7,000,000. On 30 June 2019, due to economic downturn, the investment property has suffered a reduction of RM500,000 in its market value. v. A new equipment was acquired by Smiley Berhad on 1 January 2019 on credit where the supplier initially quoted total payments of RM3,000,000. Smiley Berhad was given a rebate of RM100,000. The equipment underwent rigorous tests to ensure that it was fit for intended use. The testing cost incurred was RM20,000. This transaction has not been accounted for by Smiley Berhad. It is the company's policy to depreciate the equipment over a useful life of 20 years. 3. Smiley Berhad is currently facing the legal action taken by its employee due to injury caused on him during the working hours in the production area, believed due to safety negligence of the company. The settlement is estimated to be RM1,010,000. This does not include the legal cost amounted to RM90,000. Smiley Berhad legal advisors are of the opinion that there is high probability (more than 50%) that the company will lose the case. The case is expected to be settled by October 2019. 4. On 1 July 2018, the company took a long-term loan from MMD Bank in Australia. amounted AUD1,600,000. The spot rate on that date was RM2.50 : AUD1. The closing rate for the financial year ended 30 June 2019 was RM3.00 : AUD1. 5. Smiley Berhad sells aerospace equipment's that include a three-year warranty to make repair or replace any defect in its equipment. Based on previous experience, it is probable that there will be some claims under the warranties. It is estimated that the company will occur RM1,000,000 of warranty cost in the current year. 6. The accountant had obtained the following information after the company's financial year end: i. On 31 July 2019, one of the debtors who owed the company RM2,000,000 was bankrupt. Only 15% of the debt could be collected from him. ii. As at 22 July 2019, a fire broke out in one of the company's warehouse in Penaga, Seberang Perai. The loss was estimated at RM800,000. iii. On 25 August 2019, the chief executive officer of Smiley Berhad announced a plan to open a new factory in Hanoi, Vietnam. The estimated initial expenditure was RM100,000,000. Project 2 FAR270 5 iv. The directors are forecasting that there will be a decline in sales in the following year as a result of the increase in competition in the market. Therefore, a provision of future operating losses of RM4 million are to be provided at year end. 7. The current year estimated taxation was RM3,500,000 and interest on debentures and interest on bank loan for the year had not been paid. 8. Other provisions are to be made for: i. Final dividend on non-redeemable preference shares of RM2,000,000 ii. The allowance for impairment trade receivables are to be increase by 12% of the remaining account receivables due to uncertainty in economy. The increment will be treated as administrative expenses. iii. External auditors' fee of RM250,000. 9. The company adopted the following policy: i. Building, plant & equipment will be depreciated using a straight-line method over the useful life on monthly basis. ii. Estimated useful life for all intangible assets is 5 years. iii. Depreciation on building, and amortization of intangible assets are to be included as part of administrative expenses. iv. Depreciation on plant and equipment are to be treated as part of cost of sales. Required: Prepare the following financial statements in a form suitable for publication and in compliance with the Companies Act 1965 (as amended) and the Malaysian Financial Reporting Standards (MFRS): i. Statement of Profit or Loss and other Comprehensive Income for the year ended 30 June 2019. ii. Statement of Changes in Equity for the year ended 30 June 2019. iii. Statement of Financial Position as at 30 June 2019. iv. The Notes to the Financial Statements for property, plant and equipment and nonadjusting event after reporting period. (70 marks)