COMPREHENSIVE CASE 2

BKAR1013 Financial Accounting & Reporting 1

Property, Plant and Equipment, Inventory & Receivables
A191
Group Discussion in class on 10 November 2019
Submission and presentation date: 20 November 2019 (Submit in class)

For presentation: You are required to present answers for all EXCEPT Part 2
Group 3 presents answer for Question 1&2
Group 4 presents answer for Question 3&4
Group 5 presents answer for Question 5,6,7&8
Group 6 presents answer for Question 9

For report submission: Answer All questions.

Part 1:

Asia Textile Bhd is a trading company in Malaysia that sells fabrics. It has been 10 years in
the market and the company is very optimistic for its yearly sales growth. The company is
now a leading company that received an overwhelming demand from customers. Asia Textile
has become customers’ number one choice when it comes to fabrics due to the high quality,
good designs, reasonable prices and variety of choices.

Asia Textile sells three types of fabrics: cotton, crepe silk and songket. Currently Asia Textile
uses perpetual inventory recording system. However, in terms of cost flow assumption, the
company uses different method based on sales. Due to the characteristics of the fabrics and
the pattern of sales made for each fabric, the company uses FIFO (First-In-First-Out) method
for cotton, moving average method for crepe silk fabrics, and specific identification method
for songket fabric.

Asia Textile uses calendar year in recording its accounting records and prepares its financial
statements every 12-month. All transactions related to inventory are recorded using gross
method. Followings are the details of the fabrics inventories as recorded in the system dated 1
January 2019.

15 January Received on hand the 500 metres of printed Egyptian Cotton from a supplier
in Indonesia. The order was made on 13 December 2018. The cost for each
metre is RM40. The import duties and taxes charged to the Asia Textile for
the purchases made are RM500 and RM250 respectively. The transportation
cost to deliver the fabrics to the premise is RM300. The purchase of the
fabric was made by cash. Payment to the supplier was made upon the receipt
of the fabrics.
1 March Sold 30 metres of batik crepe silk to Kasuma Holdings by credit at a price of
RM135 per metre. The credit terms given was 2/30, n/45.
30 March Received payment from Kasuma Holdings.
20 April Purchased 200 metres of Songket from a supplier in Brunei at the total cost
of RM60,000. The transportation cost amounted RM270 is signed under FOB
shipping point term. Asia Textile receives trade discount of RM400 from the
 supplier. The purchase was made by cash.
5 May Purchased 50 metres of batik motif Crepe Silk from a supplier in Kelantan.
Each metre of the fabric costs RM125. The transportation cost amounted
RM150 is signed under FOB destination term. The purchase of the fabric was
made by cash.
13 June Sold 25 metres of Egyptian Cotton at a price of RM55/metre and 130 metres
of Songket Terengganu at a price of RM420/metre to Hasbul Sdn Bhd by
cash.
7 July 5 metres of the batik motif Crepe Silk bought on 5 May were returned to the
supplier due to major defect and received full payment.
10 September 4 metres of Egyptian Cotton was returned by Hasbul Sdn Bhd due to colour
defect. Full payment was paid to the customer.
25 November Sold 120 metre of Songket Brunei to Landa Gim at a price of RM350/metre
by credit with a term of 3/60, n/80.

In the system record, the amount of each type of fabric at 1 January 2019 is as follows:

Egyptian Cotton Crepe Silk Songket

Unit (metres) 240 350 300
Cost per metre RM38 RM115 RM350
Type Terengganu

Additional information:

The balance of inventory of songket as at 31 December 2019 is:

a) Songket Terengganu: 170 metres

b) Songket Brunei: 80 metres

In addition to that, information on receivables of Asia Textiles are as follows.

Scenario 1

The chief accountant of Asia Textiles provides the following list of accounts receivable
written off in the current year.

Date Customer Amount (RM)

31 March Erina Clothing Sdn Bhd 7,800
30 June Sentosa Apparel Sdn Bhd 9,700
30 September Alia Textile Sdn Bhd 7,000
31 December Raisha Collection Sdn Bhd 9,830

Asia Textiles follows the policy of debiting bad debt expense as accounts are written off. All
of Asia Textiles’s sales are on a 30-day credit basis. Sales for the current year total
RM2,200,000. The balance in Accounts Receivables at year end is RM77,000 and an analysis
of customer risk and charge-off experience indicates that 12% of receivables will be
uncollectible (assume a zero balance in the allowance).
Scenario 2

Asia Textiles finances some of its current operations by assigning accounts receivables to a
finance company. On 1 July 2019, it assigned under guarantee, specific accounts amounting
to RM150,000. The finance company advanced to Asia Textiles 80% of the accounts
assigned (20% of the total to be withheld until the finance company has made its full
recovery), less a finance charge of 0.5% of the total accounts assigned.

On 31 July 2019, Asia Textiles received a statement that the finance company had collected
RM80,000 of these accounts and had made an additional charge of 0.5% of the total accounts
outstanding as of 31 July. This charge is to be deducted at the time of the first remittance due
Asia Textiles from the finance company. On 31August 2019, Asia Textiles received a second
statement from the finance company, together with a check for the amount due. The
statement indicated that the finance company had collected an additional RM50,000 and had
made a further charge of 0.5% of the balance outstanding as of 31 August 2019.

Case instruction:

(1) Based on the information given above, compute the cost of the fabrics purchased in
January, April and May 2019.
(2) Prepare a schedule to compute the cost of sales and value of ending inventory for each
type of inventories as at 31 December 2019.
(3) Prepare journal entries to record all the transactions.
(4) Mr. Alif, the accountant in Asia Textile found it tedious to use two different cost flow
methods for Crepe Silk and Egyptian Cotton fabrics. Mr. Alif wants to suggest the
management to use only one method to record inventory for both fabrics. This is due
to the almost similar pattern of sales made by both fabrics. Prepare a schedule to show
the cost of sales and ending inventory using FIFO method for crepe silk fabric.
Compare the result with your answer in (2) and suggest to Mr. Alif whether he should
proceed with his suggestion to the management. Provide justification.
(5) Do you agree or disagree with Asia Textiles’s policy concerning recognition of bad
debt expense in Scenario 1? Why or why not?
(6) By what amount would net income differ if bad debt expense was computed using the
percentage-of-receivables approach in Scenario 1?
(7) Explain allowance method in estimating bad debts and provide justification for its
use.
(8) Assume in Scenario 1, Asia Textiles uses the allowance method to estimate bad debts
instead of direct write-off method. How should Asia Textiles account for the
collection of the specific accounts previously written off as uncollectible?
(9) Prepare all necessary journal entries in Scenario 2 for Asia Textiles.

PART 2
Shamsiah Bhd which was incorporated in 2010, need two machineries to expand the business
operation. The first machinery was bought from other company, however the second
machinery was self-constructed by company.

Machinery 1

On 1 March 2019, Shamsiah Bhd places an order for a machinery from a company in New
Zealand. The machinery was delivered on 29 March 2019 and the invoice price of machinery
was RM100,000 with a cash discount of 2% if paid within 30 days. Payment was made
during discount period. Import duties and taxes amount to RM20,000. The following costs
were also incurred:

a. Delivery and transportation costs was RM12,500.

b. Installation and commissioning costs was RM12,000.
c. Administrative costs was RM2,500.
d. Start-up and pre-production costs was RM6,000.
e. Insurance on shipment was RM2,300.
f. Exchange currency loss from the transaction with New Zealand company was
RM1,500.
Machinery 2

On August 2019, Shamsiah Bhd constructs the machinery for its own used in production.
The expenditures related to construct the machinery were:

a. Contractor costs to construct the machinery was RM21,000.

b. Direct labour and material used in the construction was RM17,000.
c. Engineering and technical overheads cost was RM5000.
d. Interest incurred to finance the construction was RM4,000.
e. Costs of testing the machinery was RM2,000.
f. General administrative costs allocated was RM3,200.
g. Advertising costs was RM1,000.
Of the direct material and labour used, RM3,000 is attributable to cost inefficiencies caused
by a labour strike. During the testing of the machinery whether it is functioning properly, this
company produce a sample from the machinery which has been sold at RM800.

Asilah, a junior accountant in the company was uncertain about the accounting treatment for
all the expenditure incurred and revenue earned (if any). Since you are a senior accountant in
the company, she need your advice related to this matter.

REQUIRED:

(CTPS question, refer rubric for marking):

1. Identify the issue (s) faced by Asilah, the junior accountant of Shamsiah Bhd.
 (Problem identification).

2. Analyse the problem (s) faced by Asilah by referring to related paragraph in the
MFRS 116 Property, Plant and Equipment.
(Problem analysis)

3. Help Asilah to make a decision related to the above issue (s) by providing
justification based on the MFRS 116 Property, Plant and Equipment.
(Generation of solution, evaluation and decision making).
 Appendix 1

Critical Thinking and Problem Solving (CTPS) Rubric

Semester Session : __________________________________________________
Course Name ( Course Code) : __________________________________________________
Lecture group :
Student Name (Matric No) : __________________________________________________
Task description :___________________________________________________

CONTENT (Critical Thinking and Problem Solving)

Traits
1 Problem Identification
2 Problem Analysis
3 Conceptualization and
Generation of solutions
Poor
(0-3)
Unable to identify
issue/problem even with
assistance.
Unable to analyze
issue/problem and fail to
define the contributing factors.
Unable to generate any new
ideas and/or offer alternative
solutions.
Fair
(4-6)
Able to identify issue/problem
with minimum assistance.
Able to analyze issue/
problem but does not clearly
describe the contributing
factors.
Able to generate new ideas
and/or provide alternative
solutions with some
assistance.
Good
(7-9)
Independently able to
identify issue/problem with
clarity.
Able to analyze issue/problem
and clearly describe some of
the contributing factors.
Able to generate new ideas
and/or provide alternative
solutions without assistance.
Excellent Score
(10-12)
Independently able to
identify issue/problem very
clearly and accurately.
Able to analyze issue/problem
and clearly describe all the
contributing factors. x2
Able to generate new ideas
and/or provide alternative x2
solutions with accuracy,
clarity and detailed.

4 Evaluation
5 Decision making
Unable to evaluate
appropriate alternative
solutions.
Unable to make decision
based on identified ideas and
solutions even with assistance.
Able to evaluate several
alternative solutions with
some reasonable assistance.
Able to make decision based
on identified ideas and
solutions with some
assistance.
Able to evaluate several
alternative solutions with
minimum assistance.
Able to make good decision
based on identified ideas and
solutions with minimum
assistance.
Able to evaluate several
alternative solutions clearly
and accurately without
assistance.
Able to make excellent
decision based on identified
ideas and solutions without
assistance.

TOTAL SCORE /84