Nature Bhd has been operating in hospitality and construction industry for more than five decades. The company’s annual report for the year ended on 30 June 2018 had already been prepared by the company’s accountant. The board of the director of the company announced, on 1 August 2018, that the annual report of the company will be issued three months after the company’s year-end. The following are additional information and events which have not been considered in the preparation of Nature’s Bhd financial statement: 1. Nature Bhd had among its receivable a debtor, Rainbow Bhd. with a balance of RM368,000 as at 30 June 2018. There is no provision of doubtful debt that had been made in respect of this debt since the board of director of Nature Bhd. was of the opinion that the debt was wholly collectible. On 31 July 2018, Nature Bhd. was informed that Rainbow Bhd., due to its financial difficulty, had been placed under receivership.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Nature Bhd has been operating in hospitality and construction industry for more than five
decades. The company’s annual report for the year ended on 30 June 2018 had already been
prepared by the company’s accountant. The board of the director of the company announced,
on 1 August 2018, that the annual report of the company will be issued three months after the
company’s year-end. The following are additional information and events which have not been
considered in the preparation of Nature’s Bhd financial statement:
1. Nature Bhd had among its receivable a debtor, Rainbow Bhd. with a balance of
RM368,000 as at 30 June 2018. There is no provision of doubtful debt that had been
made in respect of this debt since the board of director of Nature Bhd. was of the
opinion that the debt was wholly collectible. On 31 July 2018, Nature Bhd. was
informed that Rainbow Bhd., due to its financial difficulty, had been placed under
receivership.
2. Nature Bhd purchased a building in the middle of 2012 at a cost of RM12 million.
The building was estimated to have a useful life of 45 years. Nature Bhd has
depreciated the whole building using
commencing from 2012. However, the building comprises of an escalator and other
fixtures which have significantly different useful lives. On August 2017, the newly
appointed accountant of Nature Bhd realises that the escalator and other fixtures of
the building should be separately depreciated. However, the details accounts of
these fixed assets have not been kept and it is impracticable for the company to
determine the respective costs and
assets if they had been separately depreciated since 2012.
3. On 5 September 2018, as part of its expansion strategy, Nature Bhd had acquired
550,000 ordinary shares of par value of RM1.00 each, representing 100% of equity
interest in Lagoon Bhd for a total consideration of RM1.3 million. Consequent to
the acquisition, Lagoon Bhd has become a wholly-owned subsidiary company of
Nature Bhd.
4. In January 2016, Nature Bhd entered into a contract to build a luxury resort. The
project is scheduled to be completed in June 2019. The contact price is RM417
million. The company, for the accounting year ended on 30 June 2016 and 2017
adopted the completed contract method under which no profits is recognised until
the project is completed. When it is realised that it is the percentage of completion
method that shall be adopted as per requirement of MFRS 111 Construction
Contract, the company immediately adopted this method for the accounting year
ended on 30 June 2018.
REQUIRED:
Based on MFRS 108 Accounting Policies, Changes in Accounting Estimates and Errors and MFRS 110 Events after the Reporting Period, classify each of the above transaction whether it is a change of accounting policy, change of accounting estimates, an error or subsequent events after the reporting dates and explain the appropriate accounting treatment for the transactions.
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