Question Microvex (MX) is a GST-Registered Company in the Software Development Business: Accountancy Assignment, SMU, Singapore

Question:

Microvex (MX) is a GST-registered company in the software development business and its financial year ends on 30 June. MX has an accounting policy to carry its property, plant, and equipment (PPE), and intangible assets (IA) at cost model, and its investment property (IP) at fair value model. The junior accountant noted the following issues in Notes (1) to (4) while preparing 2019/2020 financial statements prior to the issuance date on 15 September 2020.

Notes

(1) MX started a research project on new software, GEX. On 30 June 2016, MX incurred a total research cost of $500,000 on GEX. MX capitalized the research cost upon incurrence and amortized it immediately on a straight-line basis over its five-year estimated useful life with no residual value. Subsequent to the capitalization of the research cost, MX demonstrated its intention, ability, and technical feasibility of completing GEX, and has sufficient resources to do so by 1 January 2017. On 30 June 2017, MX incurred a development cost of $750,000 on GEX. Upon incurrence of the development cost, MX capitalized it as a subsequent cost incurred on GEX and amortized it accordingly. MX reported the software GEX on the financial statements as of 30 June 2020 and the

breakdown of its book value is as follows:

The completed GEX was available for use in MX’s operations from 30 June 2018 to 30 June 2023, with no residual value.

(2) MX signed a Sales and Purchase Agreement on 1 July 2018 to acquire a sales office to expand its geographical coverage of business activities. The purchase price of the sales office was $1,070,000, inclusive of 7% GST. On top of the purchase price, MX also paid a total sum of $150,000 for legal fees and agent commission for such acquisition. Although the sales office was available for use from 1 January 2019, MX chose to put the sales office into operation from 30 June 2019 onwards. The sales office is depreciated on a straight-line basis and has an estimated useful life of 10 years with no residual value. MX reported the sales office on the financial statements as at 30 June 2020 and the

breakdown of its book value is as follows:

(3) MX reclassified its old machinery as held for sale on 30 June 2019 when it met all the recognition criteria of SFRS(I) 5 Non-Current Assets Held for Sale and Discontinued Operations. The old machinery was purchased on 30 June 2016 at a cost of $500,000. The asset is depreciated on a double-declining basis with an estimated residual value and useful life of $10,000 and 5 years, respectively. The junior accountant has correctly recognized the depreciation of the old machinery before the reclassification. The fair value fewer costs to the selling of the held for sale asset item as of 30 June.

2019 was $120,000. MX recognized the difference between fair value fewer costs to selling and carrying amount of the held for sale asset item as a fair value gain in the statement of profit or loss on 30 June 2019. MX continued to report and recognize the old machinery as held for sale at a value of $120,000 as of 30 June 2020, since it satisfies all the exception criteria in SFRS(I) 5 Non-Current Assets Held for Sale and Discontinued Operations in the event of a sale not completed within a year of the reclassification.

(4) MX has an office building solely for its own use before the Covid-19 outbreak. However, amid Covid-19, only 10% of MX’s essential workforce is allowed to commute and work at MX’s office building on a daily basis, occupying 25% of its office building’s total floor area. With the availability of the remaining 75% floor area, MX decided to look for a tenant and rent it out on an operating lease. On 30 June 2020, MX successfully leased out the remaining 75% of its office building’s floor area to a logistic company. On the same day, MX immediately reclassified the entire office building as an investment property at its fair value of $3,000,000. Prior to the reclassification on 30 June 2020, the carrying amount of the office building was $2,500,000 (net of accumulated depreciation of $1,000,000). The depreciation expense of the office building was recorded correctly in the financial year 2019/2020. The entire office building cannot be sold or rented out on a finance lease separately.

Required

i. Critically evaluate MX’s accounting treatment of intangible assets over the financial periods from 2016 to 2020 in Note (1). Provide all the necessary adjusting and/or correcting journal entries for the financial year 2019/2020, if any.

ii. Provide all the necessary adjusting and/or correcting journal entries for items in Notes (2) and (3) above for the financial year 2019/2020, if any.

iii. Critically evaluate MX’s accounting treatment of its office building on 30 June 2020 in Note (4). Provide all the necessary adjusting and/or correcting journal entries for the financial year 2019/2020, if any.

iv. Determine the effects on the 2019/2020 financial statements if the necessary adjusting and/or correcting journal entries in requirements (i), (ii), and (iii) above were not made. Compute the aggregated effects and not just calculated partial effects from each requirement (i), (ii), and (iii).

Key ans:

(i) DR Beg. Acc. Amortisation (IA) $525,000;

(ii) DR Beg. Sales Office (PPE) $150,000, CR Beg. Machinery (HFS) $12,000;

(iii) DR Revaluation Reserve $500,000;

(iv) BRE (O) $105,500

Guiding Questions:

(i). There are two parts to attempt to in this requirement, namely critical evaluation, and journal entries.

a. In the part of critical evaluation, you are required to distinguish the different accounting treatment of research cost from development cost and identify the prior year and current year errors correctly or work out the amortization accurately.

b. Do not amortize the asset prior to 30 June 2018 or capitalized the research cost as part of the cost of the asset.

c. In the part of journal entries, you are required to correct/adjust the prior period error in the current financial year and provide the required correcting/adjusting journal entries correctly due to the correct identification and evaluation in the earlier part.

(ii). Identify and capitalize the costs that directly attributable to the asset acquired in Note (2).

a. There is no need to capitalize the GST payment of $70,000 since the firm is a GST-registered company.

b. Do not depreciate the asset from the day the asset was put into operation.

In Note (3), work out the yearly depreciation expense of the asset using the double-declining depreciation method before the asset was reclassified as NCAHFS.

a. Do not use the cost net of residual value and the net book value net of residual value to account for the depreciation charge.

b. Note that there was no gain to be recognised in the profit or loss if the fair value less costs to sell was higher than the carrying amount upon reclassification of NCAHFS.

(iii). Identify the classification error of the asset in Note (4). Evaluate the accounting treatment done by the company on 30 June 2020.

a. In terms of correcting/adjusting journal entries, there is an erroneous transfer from PPE (cost model) to IP (fair value model) done by the company on 30 June 2020 should have already involved a revaluation of PPE under SFRS(I) 1-16 Property, Plant and Equipment before the transfer. Hence, the revaluation reserve was omitted in the correcting journal entries.

b. Determine how the error was recorded and correct the error appropriately.

(iv). Students are required to determine the effects on the 2019/2020 financial statements if the necessary correcting/adjusting journal entries in requirements (i), (ii), and (iii) above were not made.