Reference no: EM132742353
Question - Financial Accounting and Reporting - Intangible Assets
QUESTION 1 - At the end of 2016, Green Energy Bhd successfully developed a green and sustainable engine, which is called CCO5 engine that runs on extract from coconut oil. In order to protect the technology of the engine, the company acquired a patent at a cost of RM600,000 on 1 January 2017. The legal life of the patent is six years while the economic useful life of the patent is five years. On 31 December 2017, due to adverse press reports on the new technology, the patent was deemed to have a recoverable amount of RM440,000. The recoverable amount of the patent was RM350,000 on 31 December 2018.
Meanwhile, as part of its diversification strategy, on 1 January 2018, Green Energy Bhd acquired a small and medium technology company, ZTECH Sdn Bhd. Green Energy Bhd paid RM2,350,000 to acquire all of the ordinary shares of the ZTECH Sdn Bhd. This company was then became a division (cash generating unit) of Green Energy Bhd. It was determined that at the date of the purchase the fair value of the identifiable net assets of ZTECH Sdn Bhd was RM2,100,000. Over the next 10 months of the operations, the newly purchased division experienced operating losses. In addition, it was appeared that it will generate substantial losses for the foreseeable future. At 31 December 2018, ZTECH division reported the following in statement of financial position:
|
|
RM
|
|
Current assets
|
630,000
|
|
Non-current assets (including goodwill recognized in purchase)
|
2,200,000
|
|
Current liabilities
|
(300,000)
|
|
Non-current liabilities
|
(700,000)
|
|
Net assets
|
RM1,830,000
|
On the same date, it was determined that the present value of expected future cash flows of the ZTECH division was RM1,935,000.
REQUIRED -
(a) Prepare the relevant journal entries related to the patent on the following dates:
(i) 31 December 2017
(ii) 31 December 2018
(b) Determine the impairment loss (if any) of ZTECH division on 31 December 2018 and prepare the journal entry (if any) to record the impairment loss.
(c) Assume that the value in use of ZTECH division on 31 December 2018 was RM1,740,000. Determine the impairment loss (if any) on 31 December 2018 and prepare the journal entry (if any) to record the impairment loss.
QUESTION 2 - During the year 2017, FGG Bhd developed a green technology that helps to extract latex from rubber tree efficiently. In order to protect the exclusive right on the technology, the company applied and successfully defended a patent at a cost of RM840,000 on 1 April 2017. The useful life of the patent is ten years and it is expected that the economic benefits of the patent will be consumed evenly throughout its useful life. At the end of the year 2017, there is no indication of impairment on the patent.
However, at the end of the year 2018, an impairment test indicates a significant drop in the price of latex. This may affect the cash flows generated from using the assets, including the patent. On 31 December 2018, the patent was assessed to have a recoverable amount of RM600,000.
In addition, the company also assessed the value of its cash generating unit of CYC division at the end of the year 2018. The company had acquired CYC Sdn Bhd on 1 July 2016 and treated CYC as a division (cash generating unit) of FGG Bhd. At the acquisition date, the different between the fair value of the identifiable net assets of CYC division with the cash consideration paid was RM120,000. During financial year 2018, CYC experienced operating losses. It is expected that CYC division will generate substantial losses for the foreseeable future. At 31 December 2018, carrying amount of CYC division's net assets (including the goodwill) is RM1,345,000. Meanwhile, the present value of expected future cash flows of CYC division's net assets is RM1,320,000.
FGG Bhd's financial year end is at 31 December.
REQUIRED -
(a) Prepare the relevant journal entries related to the patent on 31 December 2018.
(b) Determine the impairment loss (if any) of CYC division on 31 December 2018. Prepare the journal entry to record the impairment loss (if any).
(c) Assume that the recoverable amount of CYC division's net assets in the following year 2019 improves and exceeds the carrying value of CYC division's net assets. Discuss the accounting treatment according to MFRS 136 Impairment.
QUESTION 3 - On 1 January 2018, MM Bhd acquired a fast food franchise for RM300,000. The legal life of the franchise is seven (7) years while the economic useful life is six (6) years. On 31 December 2018, the franchise was revalued at RM340,000. Due to the outbreak of the COVID-19 at the end of year 2019, sale of fast food from the franchise is declining. Impairment test conducted showed that the fair value of the franchise was RM250,000. At this date the current trend of the outbreak indicates further sale declining in the next six (6) months. The company adopts the revaluation model to record the franchise.
The company also has legal title to a soft drink brand which was acquired on 1 January 2019 at RM350,000. The brand product is expected to generate cash inflow indefintitely. However, there is no active market available for this type of soft drink. On 31 December 2019, impairment test conducted showed the recoverable amount of the brand was RM310,000.
Financial year end for the company is 31 December.
REQUIRED -
(a) Prepare journal entries to record the accounting treatment related to the franchise of MM Bhd on 31 December 2018 and 31 December 2019.
(b) Explain the accounting treatment for the soft drink brand of MM Bhd on 31 December 2019.