Case Study Nov2011-Apr2012

FAR360 TABLE OF CONTENT

Wardah Apparel Sdn. Bhd

Content 1 2 3 4 5 6 7 Introduction Budget of 2011 Actual Activities for the year ended 31 December 2011 Additional Activities during the year ended 31 December 2011 Other additional information for the year ended 31 December 2011 Auditing Taxation Requirements Appendixes

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Case Study Nov2011-Apr2012 INTRODUCTION

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Wardah Apparel Sdn. Bhd

Wardah Apparel Sdn. Bhd is a medium scale company manufacture of T-shirts bearing the names and logos of several major universities in Malaysia. Located in Taiping, Perak, the company is wholly owned and managed by Encik Munaim, who started the firm three years ago. Encik Munaim invested RM300,000 as a capital to start the business. The entire business is operated in a single building. The manufacturing process is highly automated, using three machines to cut out pieces of fabric, stitch them together, and imprint the name and logo of one of the several universities. BUDGET FOR THE YEAR ENDED DECEMBER 2011 Wardah Apparel Sdn. Bhds master budget for the year 2011 has just been completed. The companys accounting period ended on 31st December each year. Expected sales demand for the year ended 2011 is 90,000 units, where each quarters sharing demand is 30%, 10%, 20% and 40%, respectively. The expected sales price is RM 35 per T-Shirt. The closing stock for the first quarter is 500 T-shirt. The ending stock for the following quarters need to be increase to 5%,10% and 15% from the next quarters expected sales. The expected sales for the first quarter of next year, 2012, which is assumed to be 15,000 units. The heaviest volume is expected to be in the first and fourth quarters. The first quarter sales reflect the return of students to campus in January. The fourth quarter sales reflect not only heavy sales during September intake but also sales during holiday period. Direct Material Budget Planned production and raw material purchases is a particularly critical linkage in manufacturing firms. Thus, considerable effort is devoted to careful inventory planning and management. Wardah Apparel Sdn. Bhd use direct material cost at a unit level cost. Each shirt requires 1.5 meters of fabric. The standard cost per meter is RM 2.50. The closing stock of fabric for the first quarter is 895 meters. The ending stock for the following quarters are 10% of the next quarters expected raw material requirements. The expected raw material for the first quarter of next year, 2012, is assumed to be 21,000 meters.

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Direct Labour Budget Wardah Apparel Sdn. Bhd direct labour budget is based on each quarter planned production. Since Wardah Apparel Sdn. Bhd is a medium size company, Encik Munaim employed direct labour in two groups- skilled workers and semi-skilled workers. Thus, Wardah Apparels direct labour cost may be adjusted up or down to meet short term needs. Each T-shirt manufactured required 0.20 hours (12 minutes) of skilled workers and 0.35 hours (21 minutes) of semi skilled workers. For the year ended 2011, the rate per hour for skilled worker and semi-skilled worker will be paid for RM 10 and RM 6.00, respectively. Budgeted Costs for the year 2011 RM Indirect Materials Factory electricity (machinery) Set-up Cost Purchasing and material handling Inspection Design Supervision salaries Insurance Maintenance Utilities Selling Overhead -sales salaries -sales commissions -freight outwards -advertising -travelling expenses Administrative Overhead -licensing fees for use of universities names and logos -clerical wages
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1,250 750 10,000 1,200 800 4,000 5,600 9,600 10,400 10,000

8,000 3,000 2,000 1,000 11,000

600 5,000

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-manager salary -entertainment expenses

72,000 10,000

Wardah Apparel Sdn. Bhd using Activity Based Costing for the following overhead costs:Overhead Indirect Materials Factory electricity (machinery) Set-up Cost Purchasing and material handling Inspection Design Cost Driver Unit Produced Unit Produced Unit Produced Unit Produced Unit Produced New Styles Design

Cost Driver per quarter for new styles design:New design Quarter 1 styles 2.5 Quarter 2 1.5 Quarter 3 2 Quarter 4 4 Total 10

The remaining overhead costs are shared equally to all quarters. The companys accounting policy is to depreciate the Machineries at 5% per annum. One quarter of utilities is the office expenses. Overhead cost being absorbed to the cost unit based on the total machines hours of 28400 machine hours. Cash Budget The company collects 80 percent of its billings during the same quarter in which the sale is made and another 18 percent in the following quarter. 2 percent of each quarters sales are expected to be uncollected accounts. The company pays for 60 percent of its purchases during the quarter in which the purchase is made. The remaining 40 percent of each quarters purchases are paid during the following quarter of the purchase. Other overhead costs are paid during its respective quarters. The revenue in the fourth quarter of 2010 was RM240,000, whereas the purchases was RM 56,850. ACTUAL ACTIVITIES FOR THE YEAR ENDED 31 DECEMBER 2011 The closing stock for the first quarter is 1,500 T-shirt. The ending stock for the following quarters need to be increase to 5%,10% and 15% from the next quarters expected sales. The expected sales for the first quarter of next year, 2012, which is assumed to be 15,000 units. Meanwhile, the closing stock of fabric for the first quarter is 895 meters. The ending stock for the following quarters are 10% of the next quarters raw material
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requirements. The expected raw material for the first quarter of next year, 2012, is assumed to be 21,000 meters. However, due to a highly competitive demand on fabric, the actual material paid for the year was RM 610,020. Each T-Shirt requires 1.5 meters of fabric which cost RM2.50 per meter. Each skilled worker spent 0.20 hours (12 minutes) per T-shirt and semi skilled worker spent 0.35 hours (21 minutes) per T-shirt. For the year ended 2011, the rate per hour for skilled worker and semi-skilled worker were RM 9.50 and RM 6.50, respectively. Actual Costs for the year ended 31 December 2011 RM Indirect Materials Factory electricity (machinery) Set-up Cost Purchasing and material handling Inspection Design Supervision salaries Insurance Maintenance -machineries Maintenence-office Utilities Selling Overhead -Sales salaries -Sales commissions -Freight outwards -Advertising -Travelling expenses Administrative Overhead -Licensing fees for use of universities names and logos -Clerical wages 600 10,000 8,000 3,000 3,000 5,000 11,000 1,550 750 10,000 1,200 800 4,000 5,600 9,600 5,400 7,800 8,000

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Manager salaries Donation

72,000 7,000

Overhead cost being absorbed to the cost unit based on the total machines hours of 30,000 machine hours. One quarter of utilities is the office expenses. ADDITIONAL INFORMATION FOR THE DECEMBER 2011 CURRENT YEAR ENDED 31

Wardah Apparel Sdn. Bhd purchased two vans which were used by the workers for transporting and distributing the T-shirts. The first van was purchased on 1 March 2011 while the second van was purchased on 2 April 2011. Each van cost RM105,000 and RM120,000 respectively. The company paid 10% of the cost price as deposit for each of the vans upon purchase. The company took up hire purchase from Hong Leong Bank for the first van at 4% interest rate per annum for repayment period of 3 years. The second van repayment period is 5 years at 4% interest rate per annum.

The hire purchase instalments are paid monthly starting 31 March 2011 for the first van and 31 May 2011 for the second van. The motor vehicles are depreciated at 10% based on monthly basis. However, on 1 November 2011, the second van involved in an accident and Encik Munaim decided to terminate the hire purchase agreement and the final payment was being settled on the same date. Hong Leong agreed to give a rebate of 30% on total finance charge. Since the van was insured, the company received RM 60,000 from the insurance company.

PLANT, PROPERTIES AND EQUIPMENT

Machineries consist of three types of machineries as follows:Cost (RM) Machine A Machine B Machine C 80,000 200,000 40,000 Date of acquisition 1 January 2008 1 July 2008 1 March 2010

It was the companys policy to depreciate machineries on cost at 20% on book value.
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The company bought an Office Equipment for RM 5,000 on 1 August 2011 which subject to 5% depreciation on cost. The companys building of RM 360,000 was bought on 1 January 2008. Encik Munaim contributed his personal savings amounted to RM160,000 to acquire the building and the remaining was financed by Public Bank at 1.5% interest per annum for repayment period of 20 years. The repayment of loan will be paid on December each year In addition, it is the

companys policy to depreciate the building at 15% per annum on cost. During the year, part on the building was rented out for RM 2,000 per annum. The actual amount of rental received for the year was RM 28,000. Tax and Audit fees paid for the year is RM 3,000 and RM5,000, respectively.

FUTURE EXPANSION PROGRAMS Since the company was formed a number of years ago, Wardah Apparel Sdn Bhd has had a website, initially developed for the business. Encik Munaim has been exploring the best way to grow the area of the business and has engaged a firm of management consultants to carry out feasibility study to allow customers to order online. The consultants have advised En Munaim to establish a purposed-built automated warehouse to deal with internet orders, alongside a professionally developed website. This proposal will involve the business in a large capital outlay and Encik Munaim is keen to assess the project carefully before deciding to go ahead with it. The table shows figures taken from the management consultants report prepared for Wardah Apparel Sdn. Bhd. into the launch of the new internet site and warehouse, identifying the costs and profits associated with the project. Warah Smart Online Project Timing Already paid At start Cost of website development Cost of building and equipping the warehouse After one year Operating profit from online sales, before
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RM 2,000.00 2,000,000.00

350,000.00

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depreciation After two years Operating profit from online sales, before depreciation After three years Operating profit from online sales, before depreciation After four years Operating profit from online sales, before depreciation After five years Operating profit from online sales, before depreciation After five years Sale of warehouse 400,000.00 550,000.00 850,000.00 1,200,000.00 675,000.00

Auditing Danial & Partners have been the auditors of the company since 1 January 2008. After being the auditors of the company for approximately three years, the company decided to replace the auditors and subsequently appointed Zahriyah & Partners as the new auditors to carry out an audit for the financial year ended 31 December 2011. Wardah Apparel Sdn Bhd has also appointed Zahrina & Co as a new tax agent. Addresses of Zahriyah & Partners, Zahrina & Co and Wardah Apparel Sdn Bhd are as follows:-

i. ii. iii.

Zahriyah & Partners, No. 12, Jalan Desa Kayang 3, Taman Desa Kayang, Taiping Perak. Zahrina & Co, No 13, Persiaran Surian, Lorong 3 Off Jalan Binjai, Taiping Perak. Wardah Apparel Sdn Bhd , 330, Persiaran Wisma Bandaraya, 34000 Taiping, Perak.

The audit team comprises an engagement partner, a manager, a supervisor and two auditors. During the entrance meeting with the management , the audit team was briefed on various issues of the company, particularly on the companys financial performance, and the issues that may affect the company directly and indirectly. Besides that, audit team has also been briefed on the companys future expansion plans. The management of the company, on the other hand, has been informed by the audit team regarding the objectives of the audit, the proposed plan and the audit
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timing. The audit team has also informed that the audit will involve an examination on the books of accounts, contracts and agreements, minutes of meeting and other supporting documents. The audit process may also involve touring the business premises and seeking assistance and information from the employees. The audit team was then given a full set of financial statements of Wardah Apparel Sdn Bhd for the year ended 31 December 2011 together with other related documents necessary for the purpose of carrying out the audit. Tests of Control Test of controls are the auditing procedures performed to determine the effectiveness of the design and operation of internal controls. To understand the internal control system of the company, the audit team has identified the internal control policies by reading the relevant manuals. The team has also had discussions with the appropriate personnel. During the performance of the tests of control on the companys payroll system, the audit team has discovered the following:Wages system Shift workers Shift workers arrive for work at about 7.00 am and clock in using an electronic identification card. The card is scanned by the time recording system and each production shift workers identification is read from their card by the scanner. The worker is then logged in as being at work. Shift workers are paid from the time of logging in. The logging in process is not monitored as it is assumed that shift workers would not work without first logging in on the time recording system. Shift workers are split into groups of about 25 employees, with each group under the supervision of a shift supervisor. If necessary, overtime is worked to complete the days quota of productions. The shift supervisor is not required to monitor the extent of any overtime working although the supervisor does ensure workers are not taking unnecessary or prolonged breaks which would automatically increase the amount of overtime worked. Shift workers log off at the end of each shift by re scanning their identification card. Payment of wages Details of hours works each week are sent electronically to the payroll department, where hours worked are allocated by the computerised wages system to each employees wages records. Staffs in the payroll department compare hours worked from the time recording system to the computerised wages system, and enters a code word to confirm the accuracy of the transfer. The code word also acts as authorisation to calculate net wages. Each week the computerised wages system calculates:
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a. Gross wages, using the standard rate and overtime rate per hour for each employee. b. Statutory deductions from wages; and c. Net pay. The list of net pay for each employee is sent over to the accounts department where an accounts clerk ensures that employee bank details are on file. The clerk then authorises and makes payment to those employees using the companys online banking system. Ever few weeks the financial accountant reviews the total amount of wages made to ensure that the accounts are accurate. Termination of employees Occasionally, employees leave the company. When this happens, the personnel department sends an e-mail to the payroll department detailing the employees termination date and any unclaimed holiday pay. The receipt of the e-mail by the payroll department is not monitored by the personnel department. Salaries system shift managers All shift managers are paid an annual salary; no overtime payments for the managers. Substantive tests The audit team has performed analytical procedures and tests of details of balances. The analytical procedures applied in several different audit stages, whereas tests of details of balances were only applied in the substantive testing stage of the audit. During the performance of the substantive tests, the audit team discovered the following transactions have not yet recorded and proposed further adjustments to the management. i. One of the customers paid for a cash sale amounting to RM500 using credit card. However, there was no record made in the sales accounts and no payment from the credit card company was received at the end of the accounting period. Monthly rental income from renting out part of the building space is RM2,000. The company received rental income in advance for the month of January and February the following year. T-shirts worth RM700 was taken from the business to entertain the staff during the companys Family Day. No record has been made in the accounts. Insurance premium paid on 1 July 2011 covers a period of one year.

ii.

iii.

iv.

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v.

Amounts outstanding on 31 December 2011 : Telephone RM350 Water and electricity RM700 Upon completion of the audit assignment, the audit team has submitted the audit files to the tax department for the computation of actual tax expenses for the year of assessment 2011.

vi.

Completing the Audit During the examination of the minutes of meeting of the company, the audit team discovered that the board of directors has approved the company to construct a building for the purpose of online order amounted to RM2,000,000. Finalising the Audit The audit filed work was finally completed on 30 April 2012 and a draft copy of audited financial statements was prepared for discussion. The exit meeting was also held on the same date. During the meeting, the management has been informed about the findings and the proposed adjustments by the audit team. The management agreed with the findings and promised to take necessary actions to improve the weaknesses in the internal control system in the future. Furthermore, they have also agreed to incorporate the adjusting entries into the general ledgers and reflected in the financial statements. On 21 May 2012, the financial statements were approved during the board of directors meeting after the entire current year audit issues have been satisfactorily resolved. Zahriyah & Partners signed the auditors report on the financial statements on the same day and on 15 June 2012, the financial statements were tabled to the shareholders of the company during the companys annual general meeting. Taxation The new tax agent for the company is Zahrina & Co that has been involved in providing tax consultations with various companies. The team is headed by Cik Zahrina Syamsul, who is a tax partner of Zahrina & Co, joined by one assistant. Meeting has been arranged with Encik Munaim to discuss on terms and conditions pertaining to the assignment. During the meeting, Cik Zahrina has explained briefly on the responsibility of the company on the submission and the due date of certain forms required. During the tax assignment, the team has discovered the following matters:-

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1. Cost of goods manufactured includes the insurance premium of RM1,000 paid to Malaysian insurance company for insuring raw material ( fabric used) from China. 2. Clerical wages paid to a disabled employee is RM300 per month. There were two disabled employees employed by the company. 3. Repairs and maintenance include cost of office equipment purchased in August 2011 amounting to RM5,000. 4. Advertising expenses of RM100 includes entrance fees paid to Persatuan Peniaga Islam Malaysia. 5. A second hand car was purchased in 2009 at a cost of RM200,000 was for the use of the general manager. 6. Donations made by the company to Persatuan Kanak-Kanak Autisme Malaysia and Persatuan Pengguna Islam Malaysia are considered as approved donations. 7. Zakat paid for the year ended 31 December 2011 is RM1,500. Encik Munaim has been appointed as the General Manager of Wardah Apparel Sdn Bhd since January 2008. He received a monthly salary of RM6,000. He was also provided the following by the company: i. ii. Travelling allowance RM6,000 per annum A domestic servant employed by the company at a monthly salary of RM400. School fees child of RM1,000 for youngest child. A drivers monthly salary of RM700 was reimbursed by the company. Living accommodation was also provided to him by the company. The monthly rental of the house is RM800 per month. Corporate memberships in a recreational club with monthly subscription of RM50. It is used for private and business functions of the employee.

iii. iv. v.

vi.

He is married with three children. The first child aged 22 and is disabled. During the year, Encik Munaim incurred RM7,000 to purchase a wheel chair and other basic supporting equipment for the childs use.
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The second child is married, aged 20 and currently a medical student at University of Malaya. The third child is 10 years old and attending a local primary school. His wife is a doctor at the General Hospital Ipoh.

ANSWER THE FOLLOWING REQUIREMENTS

In respect of the year 2011, execute the following instructions: A. MANAGEMENT ACCOUNTING a. What is budget?. Discuss five (5) key purposes of budgeting system. b. Prepare the following budget and actual activities on quarterly basis for the year ended 31st December 2011. 1. Sales budget (in unit and RM) 2. Production budget (in unit and RM) 3. Direct material budget (in unit and RM) 4. Direct labour budget (in hour and RM) 5. Manufacturing overhead budget (in RM). Please show manufacturing overhead per machine hour. 6. Calculate the unit production cost. 7. Cash Budget

B. FINANCIAL ACCOUNTING AND ACCOUNTING INFORMATION SYSTEM 1. Encik Munaim is still unclear as to the appropriate method of remunerations. You are required to explain to him the general features and relative merits of the following methods of remuneration: a. Time based/hourly rate b. Piece rate with guaranteed day rate 2. Please let this question as independent. a. Majid and Lee are the companys workers who are working 48 hours a week. They are paid on an hourly basis. The following table shows the result for the first week of January 2011 for both workers:13

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Worker Majid Lee

Hourly rate

Units Assembled

Hours worked

Standard time per unit

RM 7.00 RM 3.50

1,500 800

48 50

2.25 minutes 3.50 minutes

The workers also paid 40% of the time save (if any) at the hourly rate. If the overtime is worked, a premium of 50% will be paid. In the second week of January 2011, the company decided to change the existing remuneration scheme into a group incentive scheme.

It is hoped that this would result in an increase in productivity. Under the new scheme, the two workers work as a group and a minimum guaranteed hourly rate (RM 7.00 for Majid and RM 3.50 for Lee) is given to each worker if the group fails to produce a standard output of 2,500 units for 48 hours a week.

If the standard total production of the group exceed the standard output, a 5% increase on the minimum guaranteed rate will be given for every extra 50 units produced by the group. The result for the second week of January were as follows:Worker Majid Lee Rate per unit RM 7.50 RM 3.50 Units Assembled 1,600 1,000 Hours worked 48 48

You are required to :a. Compute the gross wages earned by each of the worker for: i. The first week of January ii. The second week of January b. What do you think of the new remuneration scheme?. Is it any better compared to the previous scheme?. Discuss c. 3. Prepare the following financial statements (unaudited) for the year ended 31st December 2011:a. Manufacturing Account b. Statement of Comprehensive Income

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c. Statement of Financial Position d. Statement of Changes in Equity e. Statement of Cash Flow (direct method) f. Notes to the accounts 4. Prepare the following financial statements (audited) for the year ended 31st December 2011:a. Statement of Comprehensive Income b. Statement of Financial Position c. Statement of Changes in Equity d. Statement of Cash Flow (direct method) e. Notes to the accounts C. FINANCIAL MANAGEMENT 1. Based on the financial year ended 31 December 2011 audited figures, compute the following key financial ratios: a. Liquidity ratios i. Current ratio ii. Quick ratio b. Efficiency ratios i. Inventory turnover ii. Average collection period (days) iii. Fixed assets turnover iv. Total assets turnover c. Leverage ratios i. Debt ratio ii. Times interest earned d. Profitability ratios i. Gross profit margin ii. Net profit margin iii. Return on equity iv. Return on asset

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Comment on the financial performance of Wardah Apparel Sdn. Bhd. For the purpose of calculating the financial ratios, use 360 days in year wherever applicable.

2. Based on the information given on the Wardah Smart Online Project, calculate the followings: a. Depreciation of the warehouse (straight-line basis). b. Average annual profit for 5 years. c. Average amount invested in the project. d. Accounting rate of return (ARR). e. Do you think that Encik Munaim should consider proceeding with the Wardah Smart Online project, based on the ARR calculated above? Assumption In order to simplify any appraisals, it will be assumed that all profits arise on the last day of a given year. The operating profits given exclude any depreciation that would be charged on the warehouse and website software. D. AUDITING 1. Describe the course of action that should be taken by an auditor if he has been approached to be nominated as the auditor by prospective client. 2. As the external auditor of Wardah Apparel Sdn Bhd, write a management letter to the directors in respect of the shift-workers wages recording and payment systems on the following matters: i. ii. iii. Identify and explain four weaknesses in the system; Explain the possible effects of each weakness; Provide a recommendation to alleviate each weakness.

3. List three substantive analytical procedures the audit team should perform on the shift managers salary system. For each procedure, state your expectation of the result of that procedure. 4. Audit evidence can be obtained using various audit procedures, such as inspection. Apart from this procedure, in respect of testing the accuracy of the time recording system at Wardah Apparel Sdn Bhd, explain four procedures

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used in collecting audit evidence and discuss whether the auditor will benefit from using each procedure. 5. Identify five general ledger accounts that are likely to be affected by the payroll and personnel cycle in most audits. 6. List five types of audit procedures that the auditor can use to determine whether payroll transactions are recorded at the proper amounts. 7. Prepare the audited financial statements of Wardah Apparel Sdn Bhd for the year ended 31 December 2011 in accordance with the applicable approved accounting standards and the provisions of the companies Act 1965 together with the auditors report.

E. TAXATION For the year of assessment 2011; 1. Compute the relevant capital allowances entitled to claim by Wardah Apparel Sdn Bhd. 2. Compute the amount of actual tax payable by Wardah Apparel Sdn Bhd. 3. Compute the chargeable income for Encik Munaim assuming that he claimed all reliefs for the children and elects for separate assessment. 4. Explain the responsibility of Wardah Apparel Sdn Bhd with regards to the submission of relevant forms to the Inland Revenue Board Malaysia. Your answer must include the due date and the possible penalty imposed. 5. Wardah Apparel Sdn Bhd is considered to construct a building to be used as a factory. Explain to the management team of the company on the entitlement to claim for industrial building allowance. Your answer must include the following matters: i. ii. iii. iv. Whether the building is qualified as an industrial building; Capital expenditure qualified as qualifying building expenditure; The qualifying building expenditure for a purchased industrial building. If only part of the building is used as an industrial building, does it affect the availability to claim for industrial building allowance?

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v.

Where the company incurred capital expenditure on preparing, cutting, tunneling or leveling land in order to prepare a site to for the installation of the machinery or plant to be used for business purpose, explain whether the company is entitled to claim for industrial building allowance for the particular expenditure. Assuming that Wardah Apparel Sdn Bhd constructed an industrial building in 2007 and put into use in 2009. The building was subsequently disposed to another company in 2010. What is the tax implication on such disposal?

vi.

Note: a. You are required to prepare final report for all requirements and b. Present your answer for all requirements during the presentations.

(Total marks : 40 marks)

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Case Study Nov2011-Apr2012 Appendix 1

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Wardah Apparel Sdn. Bhd

Wardah Apparel Sdn Bhd (Incorporated in Malaysia) tatement of Financial Position as at 31 December 2010
2010 RM ASSETS Non-current assets Land Building Machineries 245,135 198,000 189,493 632,628

Current assets Inventories Raw Materials Finished Goods Accounts receivable Bank

15,500 4,200 43,200 161,800 224,700

TOTAL ASSETS EQUITY AND LIABILITIES Share capital Retained earning

857,328

486,603 167,985 654,588

Non-current liabilities Loan-Public Bank Current liabilities Accounts payable 180,000 180,000 22,740

22,740 TOTAL EQUITY AND LIABILITIES 857,328

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