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sir I did not understand this unwinding concept.
P has a liability to pay 2000 in 3 yrs time which has not yet been recorded. the liability is measured at its present value of 1680 at the date of acquisition.
”the sofp date s 1 year after the date of acquisition and so the present value of the liability will have increased by 6% by the SOFP date.”
dr finance cost 101
cr deferred consideration 101i have understood calculation of present value but the quoted part made me confused. as far my understanding , that 101 goes to p/l account and added in NCL in sofp . i don’t know if i am right
that was the year 1 adjustment.
so in year 2, how to deal with this question?
i just tried . i don’t know if i am right 🙁
(1680 +101)* 6% = 106.85
dr finance cost 106.85
cr deferred consideration 106.85
in p/l it is 106.85 and sofp it wll be (1680+101+106.85 )omg!! happiness is when u get answer correct unexpectedly 😀
thank you sir 🙂So in 3yrs, the total figure be added in NCL in sofp is
yr1 1680+101(1680*6%)yr2 1781+107 (1781*6%)
yr3 1888+113(1887.86*6%)
am I right?
And that means that, at the end of 3 years, you’re showing a liability just before repayment of $2,000? It sounds good to me!
Do you mean that, when faced with costs of $33,275 for restoring the site in three years’ time, and our cost of capital is 10%, this has been correctly treated in the financial statements at its present value of $25,000
Dr Asset $25,000
Cr Provision $25,000and now you want to know what to do at the end of this first year?
Is that the question that you are asking?
It depends upon dates! You say that the figures have already been discounted to give you $25,000. Now, IF this has been correctly accounted for, (Dr Asset, Cr Provision) and IF that entry has been put through on day one of the financial period, now YOU need to account for the first year’s unrolled discount (Dr Finance Charges $2,500, Cr Provision $2,500)
But if the applicable date for the entry of the $25,000 was on the last day of the financial period, then there’s no unrolling to do
Does that answer you?
No!
I wouldn’t account for anything based on the information you have given.
Is Company X obligated to pay this $25,000?
No! They could renew the lease, so there is no definite obligation that the company is facing
It’s not clear from your question whether the company owns the property and is leasing it out to a tenant or whether Company X is itself the tenant and the $25,000 is the amount payable by the tenant in the event that they don’t renew the lease (that would be a very strange arrangement!)
“But company X is the one leasing the property …..”
Can you see how even this could be misinterpreted? If I lease a property, I could be either the landlord or the tenant!
However, the rest of your post makes it clear
The question is tricky! Ask yourself “What if they DO renew the lease? Will they again be faced with a restoration obligation?” If that IS the case, then sure, make the provision now.
But not for $2,500 as you suggest. The provision should be for the full $25,000 and then, each year, unrolled by 10%
If, after ten years, they choose to renew, there needs to be another re-assessment of the present value of restoration in (say) a further 10 years’ time
However, as each of the years goes by, there should be a re-calculation / re-assessment of the present value of the estimated future cost to restore and adjustment made as appropriate
In conclusion, yes, ok, provide $25,000 today and unroll by 10% each year
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