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Sir,
Please can you explain following adjustment from Student Accountant Article ‘Complex Groups’ – Rodney and Del
Note iv)
Del had purchased a significant amount of new production equipment early in the year. The cost before trade discount of this equipment was $50m. The trade discount of $6m was taken to the I/S. Depreciation is charged on straight line basis over 6 years.Thank you.
This is an F3 topic! Trade discounts (unlike cash discounts for rapid payment) are not reflected in any records, neither those of the buyer nor those of the seller
They are simply deducted from the selling price of the item.
In the case of Rodney and Del, the discount has been credited to statement of profit or loss and the asset recorded at the pre-discount value of 50
The double entry effected was:
Dr TNCA 50
Cr Discounts received 6
Cr Cash 44So that entry need to be corrected
But the depreciation has been calculated on the wrong carrying value of 50 and it should be calculated on the net-of-discount value of 44. So there needs to be a credit to statement of profit or loss of 1 (1/6 x 6)
Ok?
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