Reference no: EM132774913

Question - Skyscraper Property (SP) is progressively building residential and commercial properties. After operating for 10 years, now the company enjoys a remarkable performance. The top management team is actively taking steps to ensure the company continuously grows. The corporate strategic planning team is given tasks to examine potential projects and opportunities that may help strengthen the company position. Meanwhile, the financial team is given tasks on financial planning and investment and the operational team is instructed to analyse options that company should take which in return help the operations of the company go smoothly. Below are snapshots of activities that have been taken by the teams.

PART A: Hire Purchase

Serena is recently appointed as the new accountant of SP Bhd. The company is in the process of purchasing a new machine that cost RM5 million. Mrs Jean, the chief financial officer informed Serena that the company has insufficient cash to finance the purchase and provided her with two options:

Option 1: To finance the purchase of the machine by issuing RM5 million, six-year, zero interest-bearing note to the seller on 1 Jan 2019. The expected interest rate for the note is 5.5%. The company is expected to pay off the note in six RM1 million instalments, at every financial year-end. The company employs an effective interest method.

Option 2: To finance the purchase under the hire purchase agreement. The company is expected to pay a deposit of RM500,000. The hire purchase is expected to commence on 1 Jan 2019 for 5 years. The expected interest rate charge is 5% and the company uses sum-of-the-year digits method to amortise the interest. The company uses a gross method to account for the hire purchase.

The partial statement of financial position of Skyscraper Property Bhd as at 31 December 2018 is as follows:

RM000

Non-current assets 50,000

Current assets 30,000 80,000

Equity 30,000

Non-current liabilities (loans and borrowings) 30,000

Current liabilities (no loan and borrowings included) 20,000 80,000

Additional information:

1) The company closes its account on 31 December every year.

2) It is estimated that the useful life of the machine is ten years with no residual value.

3) Both loans are expected to be classified under non-current liabilities.

4) The calculation for present value annuity factor should be rounded to whole number.

CASE INSTRUCTIONS -

(i) Identify any problem experienced by Serena?

(ii) Compare the two options by preparing the pro forma statement of financial position for the year 2019. Assume all the elements in the pro forma statement of financial position will increase by 10% in 2019.

(iii) Justify which options should be undertaken by SP Bhd.