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I have an issue regarding trade in allowances. An asset that cost $6m and was written down to 1.2m replaced with an asset costing $8m, trade in allowance being $0.5m.
The journal entries are
Dr. P&L A/c 0.7m
Dr. Acc depn 4.8m
Dr. Asset $8m
Cr. Asset 6m
Cr. Cash 7.5m
Apart from this, there are other transactions, such as acquisition of asset on Finance lease and by way of loan notes,
The question is, when ascertaining the cash purchases of assets, only the amt of increase in the asset that relates to the trade-in-allowance ( of 0.5m ) is shown on the debit side. The further increase of 7.5m is not considered. Why is this so?
I would be glad if you could sort this out too! Thanks a ton!
I’m not sure what you mean! “The further increase of 7.5m is not considered.” The 8m debit in your journal entry above is surely the 7.5m cash + the value of the trade-in .5m
How is it that you think the 7.5m is not reflected on the debit side?
The question is a cash flow question. I have passed these journal entries.
In the asset account, only the increase of 1.5m is shown on the debit side, while the 6m is shown on the credit side. Thats all that has been done. The 7.5m is not shown on the debit side.
Chandini, I copy here your original post!
“The journal entries are
Dr. P&L A/c 0.7m
Dr. Acc depn 4.8m
Dr. Asset $8m
Cr. Asset 6m
Cr. Cash 7.5m”
In those entries, I see a debit to the Asset account (the third item) of $8m – or am I misinterpreting something in your post?
IF you have done what you say in your second post, why have you adopted a short cut approach? Deal with the disposal correctly and then, stage 2, deal with the purchase correctly. Don’t do a composite journal entry – do one debit represented by one credit.
That way you are less likely to get confused and should more easily be able to see what is happening
I was looking at the solution to the cash flow question, and this is what they have done.
(i)These include land which was revalued giving a surplus of $170 million during the period
(ii) The company’s motor vehicle haulage fleet was replaced during the year. The fleet
originally cost $42 million and had been written down to $11 million at the date of its
replacement. The gross cost of the fleet replacement was $180 million and a trade-in
allowance of $14 million was given for the old vehicles.
(iii) The company acquired some new plant on 1 July 20X7 at a cost of $120 million from
Bromway. An arrangement was made on the same day for the liability for the plant to be
settled by Ladway issuing at par an 8% Loan note dated 20Y3 to Bromway. The value by
which the 8% Loan note exceeded the liability for the plant was received from Bromway
Balance b/f 1,830
Revaluation surplus 170
Trade in allowance (non-cash) 14
Plant acquired in exchange for loan note 120
Disposal at book value (11)
Balance c/f (2,480)
Cash payments during year 723
In this scenario, only the increase of 14m has been considered. What about the remaining 164m?
This is qn 23 ( LADWAY ) from the Kaplan LRP kit.
Can you please explain the sum I have posted, sir?
Please help me out with thiese issues, sir!
1)What exactly is operating profit?
2) If an asset is classified as Fair value through other comprehensive income, then when it is sold, will we bring the profit in other comprehensive income, or will we take it through profit or loss (simce it is realised)?
Please help me out with these issues that have been bothering me for sometime. I would be highly indebted to you if you could sort these out, Mr.Mike Little!!
Increases in value go through comprehensive income. Gains on disposal also. But on disposal / derecognition there may be a transfer within Equity / Statement of Changes in Equity
In the context of a Statement of Cash Flows, if you’re asking about the start point, the top figure n the Statement is “profit before tax”
If you’re looking for “Operating profit” that would be profit before tax as adjusted for non-cash items.
If you seek “net cash flow from operating activities, that would be “profit before tax, adjusted for non-cash items, adjusted further for changes in working capital and further adjusted for tax, dividends and interest paid”
Thank u! You are a life saver!
@adnan: the pbt have been already included the effect of the bad debt w/o expenses, 17k and also in the Decrease of the Account Receivable balance have included this effect of the 17k bad debt w/o . So, it is adjusted for the bad debt, non cash expense to pbt. That why, in the indirect method, no need to identify the bad debt factor seperately as we have to do under direct method.
Hope this help your concern.
sir why is the bad debts not added back in PBT…can you please elaborate your comment in the lecture i:e we wouldn’t know about the bad debts..thankyou
Where, in a set of published financial statements, will you find the figure for bad debts written off?
Nowhere. In the direct method of cash flows, we ned to know the amount of cash ACTUALLY RECEIVED from our receivables and, unless we know the extent of bad debt write-offs, we are unable to arrive at that figure
Why is it not added back in pbt? How do you / will you know the figure – it doesn’t appear anywhere!
sir, in the example the figure for bad debts is already given…and in the indirect method you have not added it to pbt…can you please explain again…thankyou..
Because it is adjusted for automatically when considering the increase / decrease in working capital / receivables
well sir where do u teach…i want to take p2 from U
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