Terrar Bhd is a company engaged in trading of motor vehicles. With increasing orders received by the company since its incorporation, Terrar Bhd is optimistic of a better sales growth in the future. The company closes its account on every 31 December.

In order to meet customers demand for its product, the company acquired the plant assets of Cosmic Sdn Bhd on 2 March 2013. The plant assets consist of:

Cost (RM)

Land 3,200,000

Building 4,500,000

Warehouse 600,000

Terrar Bhd also incurred the following expenditure in cash between 15 March and 15 May 2013:

Ordinary repairs to the building RM 17,000

Additions to the building RM 300,000

The building was estimated to have useful life of 10 years with no residual value. The company used straight-line depreciation method for building and the company policy is to recognise depreciation to the nearest whole year where assets acquired during the first six-month are considered held for the entire year while assets acquired during the last six-month are not considered in the depreciation computation.

In early 2016, the company replaced the marble floor with wooden floor and the cost was RM150,000 which extends the estimated life of the building by two years. At the end of 2017, the building was revalued at RM4,200,000 by the qualified appraisal agent. On 30 December 2018, of the building was sold to TK Sdn. Bhd. for cash consideration of RM1,500,000

The company also constructed a warehouse on 1 April 2015. A piece of land was purchased for the building construction with a cost of RM123,000. On 1 April 2015, the company paid RM35,000 for architect fees. The excavation work began during the first week in April with payments made to the contractor in 2015 as follows:

Date Amount of payment (RM)

30 June 2015 120,000

1 August 2015 116,400

31 December 2015 80,000

The construction was completed on 1 March 2016 and the last payment of RM50,000 was made on the same date. To finance the construction of the building, Terrar Bhd borrowed RM400,000 from Zico Bank on 1 April 2015. The RM400,000 was a 10-year loan bearing interest at 8%. Belalng Bhd had no other borrowings.

Terrar Bhd acquired a machine in 2013. Its carrying amount as at 31 December 2015 was RM68,500. There was a widespread adverse publicity against product #334 such that the demand dropped substantially. The company decided to report an impairment loss of RM50,000 on 31 December 2015. The company estimates that the present value of cash flows expected from the future use and eventual sale of the asset at the end its useful life is RM70,000 and RM5,000, respectively.

Terrar Bhd has three main categories of inventories which are HONDA motor, SUZUKI motor, and YAMAHA motor. At 31 December 2019, the balance of Inventory account was RM3,450,000 and Allowance to Reduce Inventory to NRV (credit balance) was RM250,000. The company summarised the relevant inventory costs and market data at 31 December 2019 in the table below.

Inventory	Cost (RM)	Sales Price (RM)	Selling cost (RM)
HONDA motor	1,500,000	1,380,000	90,000
SUZUKI motor	1,200,000	1,150,000	60,000
YAMAHA motor	750,000	845,000	30,000

As a new account assistant, Miss Fizah has been assigned to calculate the amount that should appear on Terrar Bhds financial statement for inventory under the lower-of-cost-or-NRV (LCRNV) rule as applied to each item in inventory. The company applies the loss method and uses an Allowance Account to record for the write down of the inventory to net realisable value (NRV).

However, Madam Rabiatul, Terrar Bhds accountant had an argument with Mr. Zaman, senior accountant of the company regarding the method to be used to record the write down of the inventories. Madam Rabiatul wants to use the loss method to write down inventory because it is more clearly discloses the decline in the net realisable value and does not distort the cost of goods sold. But, Mr. Zaman prefers the cost-of-goods-sold method to write down because it does not call attention to the decline in net realizable value.

On 31 December 2018, the Terrar Bhd recorded an intangible asset, patent, at a revalued amount of RM6,500,000. The patent is related to a new sustainable technology in the motor engine, which was developed by the R&D team of the company. The patent was initially recorded at RM8,000,000 on 1 January 2016. The management of the company expected that the estimated future benefits from the patent would be consumed evenly for the next eight (8) years. In 2019, due to the new competition in the market, the company revalued the patent to market value of RM4,000,000. Due to this latest development the company revalued the remaining useful life of the patent to be three (3) years. Beside the patent, other intangible assets of Terrar Bhd consist of:

1. A customer list purchased on 1 April 2017 at a cost of RM680,000. The company expected that 40% of the estimated future benefits from the customer list will flow into the company in 2017 and the rest will be generated evenly in the next three (3) years.

2. The company acquired a legal title to a leading motor brand on 1 June 2018 for RM500,000. The legal life of the brand is five years but is renewable every five years at little cost. The company intends to renew it continuously. One of the companys directors believes that the brand should be amortised and an impairment test should only be carried out when the brand is renewed. In 2019, there is unexpected competition and the company may lose 30% of the market share. However, it has evidence that the brand product will generate positive cash inflows indefinitely.

CASE INSTRUCTIONS (ANSWER ALL THE QUESTIONS):

1. Determination of whether cost incurred subsequent to the acquisition of PPE should be charged to operations or capitalised involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision?

2. Prepare the journal entries to record the expenditure incurred subsequent to the acquisition of building in 2013 and determine the new cost of the building.

3. Compute the new annual depreciation for the building after the replacement cost of wooden floor made in 2016. (CTPS)

4. Prepare the journal entries to record the revaluation of the building at the end of 2017.

5. Prepare the journal entries to record the disposal for part of the building at the end of 2018.

6. (a) Calculate the amount of interest to be capitalised in 2015 and prepare the related journal entries.

(b) Calculate the amount of interest to be capitalised in 2016 and prepare the related journal entries.

7. Analyse whether the company should report an impairment loss of RM50,000.

8. Determine the net realisable value (NRV) for inventories of Terrar Bhd as at 31 December 2019.

9. Determine the proper balance in Allowance to Reduce Inventory to Net Realisable Value Account at 31 December 2019.

10. For the financial year end 2019, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory at Net Realisable Value. Prepare the related journal entry.

11. Assume that you are the Head of Accounting Department, explain to Miss Fizah:

1. What is net realisable value; and

2. Explain the rationale for the use of the LCNRV rules it applies to inventories.

(12) With regards to the argument between Madam Rabiatul and Mr. Zaman:

1. What is the issue facing Madam Rabiatul and Mr Zaman? Is there any possible ethical issue involved? (CTPS)

(b) Would the method suggest by Mr Zaman affect Terrar Bhds stakeholder (s)? (CTPS)

(c) If you are Madam Rabiatul, what would you do to overcome the issue? (CTPS)

(13) Identify subsequent measurement model adopted by Terrar Bhd to account for the patent. Justify your answer.

(14) Prepare journal entries necessary to record the necessary journal entries related to the patent in year 2018 and 2019.

(15) Prepare journal entries necessary to record the cost of the customer list and amortisation expense in 2017 and 2018

(16) Prepare journal entries necessary for the brand in 2018 and 2019. Discuss whether Terrar Bhd should record the amortisation expense in 2018 and 2019.