First transaction: DRD and Grammary On 1 January 2020, DRD enters a contract with Grammary Bhd,...

  

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First transaction: DRD and Grammary On 1 January 2020, DRD enters a contract with Grammary Bhd, for a 2-year rental of 3 printers, a cutting system, and a copy machine. The machines will be returned to Grammary Bhd at the end of the 2 years contract. The economic life of all the machines is 5 years. DRD will pay monthly payments of RM5,000 for the following services: Rental of all machines Maintenance of all machines Reimburse Grammary Bhd's administration costs associated with the contract RM / Per month 4,700 200 100 Based on reviews of market information, DRD could have bought one printer for RM60,000, a cutting system for RM40,000 and a copy machine for RM45,000 if they were purchased on cash basis. A third-party company provides similar maintenance services for RM30 per machine per month. Second transaction: DRD and Gracita A non-cancellable agreement was entered between DRD and Gracita Bhd for 6 years, commencing on 1 January 2020 for a rental of plant and machinery located in Pengering, Kedah. Gracita Bhd has several heavy plant and machinery for rental, and they typically rent them on the operating lease basis and no finance lease is given. The fair value of the plant and machinery rented by DRD was RM1,000,000, and they are expected to have an economic life of 10 years. DRD plans to use the plant and machinery for only 6 years. The annual rental of the plant and machinery is RM170,000 per annum, payable in arrears as of 31 December each year. The cost paid to the agent who manage the arrangement, which consist of a commission of RM50,000, was borne by Gracita Bhd. Points of discussions: Imagine yourself as a team from the accounting department that needs to submit this report to your management team, propose the accounting standards and accounting treatments to be applied by DRD Hillux Bhd for the two transactions above. More specifically: 1) Which items of financial statements do the two transactions relate to, and why? 2) Which accounting standards do the two transactions relate to, and why? 3) In relation to initial recognition: a) How would the initial recognition of the above transactions be reported, and why? b) What factors are used to determine the cost that can be capitalized and those that are expensed? 4) In relation to subsequent measurements: a) How would subsequent costs that relate the above transactions, if any, be reported, and why? b) How would the subsequent measurement of the above transactions be reported, and why? c) What factors are used to determine the useful life of related assets, if any? d) What factors are used to determine the residual value of related asset, if any? e) What factors are used to determine the fair value of related assets, if any? 5) In relation to disclosures: a) Aside from initial recognition and subsequent measurements in 3 and 4 above, what other disclosures should be made on the above transactions? b) Why would companies such as DRD provide other disclosures, aside from the items reported as asset, liability, equity, income and expenses? 6) Would COVID-19 pandemic impose any implication on the way DRD Hillux Bhd accounts for the two transactions above, and why (why not)? 7) Would the reporting by DRD Hillux Bhd differs from those reported by Grammary Bhd and Gracita Bhd, and why (why not)? Note: In undertaking this task, students would need to refer to the regulatory framework and accounting standards in Malaysia, including by referring to materials that have been covered in earlier FAR courses. Journal entries and calculation can be provided to assist discussion. First transaction: DRD and Grammary On 1 January 2020, DRD enters a contract with Grammary Bhd, for a 2-year rental of 3 printers, a cutting system, and a copy machine. The machines will be returned to Grammary Bhd at the end of the 2 years contract. The economic life of all the machines is 5 years. DRD will pay monthly payments of RM5,000 for the following services: Rental of all machines Maintenance of all machines Reimburse Grammary Bhd's administration costs associated with the contract RM / Per month 4,700 200 100 Based on reviews of market information, DRD could have bought one printer for RM60,000, a cutting system for RM40,000 and a copy machine for RM45,000 if they were purchased on cash basis. A third-party company provides similar maintenance services for RM30 per machine per month. Second transaction: DRD and Gracita A non-cancellable agreement was entered between DRD and Gracita Bhd for 6 years, commencing on 1 January 2020 for a rental of plant and machinery located in Pengering, Kedah. Gracita Bhd has several heavy plant and machinery for rental, and they typically rent them on the operating lease basis and no finance lease is given. The fair value of the plant and machinery rented by DRD was RM1,000,000, and they are expected to have an economic life of 10 years. DRD plans to use the plant and machinery for only 6 years. The annual rental of the plant and machinery is RM170,000 per annum, payable in arrears as of 31 December each year. The cost paid to the agent who manage the arrangement, which consist of a commission of RM50,000, was borne by Gracita Bhd. Points of discussions: Imagine yourself as a team from the accounting department that needs to submit this report to your management team, propose the accounting standards and accounting treatments to be applied by DRD Hillux Bhd for the two transactions above. More specifically: 1) Which items of financial statements do the two transactions relate to, and why? 2) Which accounting standards do the two transactions relate to, and why? 3) In relation to initial recognition: a) How would the initial recognition of the above transactions be reported, and why? b) What factors are used to determine the cost that can be capitalized and those that are expensed? 4) In relation to subsequent measurements: a) How would subsequent costs that relate the above transactions, if any, be reported, and why? b) How would the subsequent measurement of the above transactions be reported, and why? c) What factors are used to determine the useful life of related assets, if any? d) What factors are used to determine the residual value of related asset, if any? e) What factors are used to determine the fair value of related assets, if any? 5) In relation to disclosures: a) Aside from initial recognition and subsequent measurements in 3 and 4 above, what other disclosures should be made on the above transactions? b) Why would companies such as DRD provide other disclosures, aside from the items reported as asset, liability, equity, income and expenses? 6) Would COVID-19 pandemic impose any implication on the way DRD Hillux Bhd accounts for the two transactions above, and why (why not)? 7) Would the reporting by DRD Hillux Bhd differs from those reported by Grammary Bhd and Gracita Bhd, and why (why not)? Note: In undertaking this task, students would need to refer to the regulatory framework and accounting standards in Malaysia, including by referring to materials that have been covered in earlier FAR courses. Journal entries and calculation can be provided to assist discussion.

Answer rating: 100% (QA)

Answer ITransaction 1 i The lease contract is an operating lease as the lease period is 2 years and the economic life of the asset is 5 years which means the lease period is less than 75 of the life o... View the full answer