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I’m not sure why, but all the BPP questions I’m doing on this have me flapping around like a fledgling learning to fly.
BBP Revision kit No. 27 “Minco”
Please can you help
This is the financed sale of a building.
The answer provided doesn’t really explain the accounting, just says the deposit must be a liability.
Per the answer this is not “revenue” because payment is not probable.
So it is a loan then, yes?
Is the loan $2.85mil? $3mil for the sale of the building, less the deposit
So do we credit PPE the carrying value of the building to derecognise it as the Q says control has transferred? (assume this is £1.8mil cost to build?)
We then debit financial assets for the loan, yes?
What about the difference – a liability or disposal?
The answer says that principal and interest should be accounted for as a deposit liability – really? So we are financing a sale of an asset but we can’t recognise interest income yet – so then when do we recognise the income?
I’m sorry but I’m finding these asset finance questions really tough, it’s one thing to understand performance obligations, but this type of question almost feels like it’s a subject on its own 🙁Hi,
It is all very confusing but don’t get too flustered with it as I don’t think much of it is that clear but I think that what you’ve said above is effectively correct.
The sale of the building is effectively Minco lending the building to Holistic Healthco, so when they derecognise the asset as HH has control they will CR Building $1.8 million and DR Loan $2.85 million, with the remainder I presume being a profit on disposal, which is recognised immediately.
Any future receipts are then recorded as DR Bank CR Liability, and the payments will only be recorded against the loan if circumstances change and it looks likely that the amount of the loan is probably going to be received. This could not arise until towards the end of the contract but we don’t know. So to answer your other point, there will be no interest income recorded until it is probable that the loan is to be repaid, which is a bit crazy but given the risk of the lending and the likelihood of receiving the cash is prudent so goes along with the ethos of the framework.
Hope this helps.
Thanks
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