QUESTION 3 Given below are situations that are independent of each other. For all situations, the financial year end is 31 December 2006 and the financial statements are expected to be approved by the Board of Directors on 31 March 2017. For each situation, state the accounting treatment, the reasons and the amount involved if applicable. i. Bandar Heights Bhd intends to issue its 2006 financial statements on 30 March 2017. In February 2007, Bandar Heights Bhd acquired a subsidiary company Mutiara Emas Bhd. 11. CC Bhd gives warranties at the time of sale to purchasers of its product to repair or replace any defects within three (3) years from the date of sale. Based on past experience, it is probable that there will be some claims under the warranties. 1. In December 2016, Marakon Bhd was sued for damages arising from an accident that the company's vehicle was involved in. As at 31 December 2016, the company's lawyers advised that it is probable the company would lose the case and would have to pay damages amounting to RM200,000. However, the vehicle is insured and it is virtually certain that the company could recover RM150,000 from the insurance company. ii. Mawar Bhd operates profitably from a factory that it had leased under an operating lease. During December 2016, the enterprise relocates its operations to a new factory. The lease on the old factory continues for the next four (4) years, as it cannot be cancelled and cannot be re-let to another user. iii. In 2015, Mountain Apes Bhd acquired 1,000,000 shares of DEF Bhd at a cost of RM2,500,000. DEF Bhd's share capital consists of 10,000,000 ordinary shares of RM1.00 each. On 31 December 2016, a provision for diminution in investment of RM500,000 was made in respect of these shares. The provision took into account the impairment in value of the investment. These shares were sold on 20 February 2017, resulting in a loss of RM100,000. The loss of RM100,000 reflects further deterioration in share prices after 31 December 2016. iv. On 10 January 2017. Bidi Bhd's factory was destroyed by a fire due to a sabotage from a rival company. The factory was not insured sufficiently and the loss suffered from the fire is estimated to be RM500,000. 3 Semut Semut Bhd acquired a piece of machinery on 1 January 2012 for a cash consideration of RM100,000. The machine is expected to have a useful life of ten (10) years with no residual value. The company uses the straight line method of depreciation for the building. In January 2016, it is estimated that the machine will have a remaining life of four (4) years. The estimated useful life of the machine was changed from ten (10) to eight (8) years. vi. In January 2017, the Board of Directors of Penawar Bhd announced the closure of its fishing division in Tanjong Sepet. The division's carrying value before the announcement was RM270,000. Its value in use after the announcement is RM320,000 and its fair value less costs to sell is RM430,000. A buyer has been found for this division at the asking price and the sale will be completed in 2017. (Total: 20 marks)