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interest cost on provision in cash flow

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › interest cost on provision in cash flow

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by AvatarMikeLittle.
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    Posts
  • May 27, 2017 at 3:30 pm #388431
    Avatarkengara
    Member
    • Topics: 197
    • Replies: 107
    • ☆☆☆

    Hi my tutor i have a question relation to the above question

    At 1 October 20X0, BK had an accrued interest payable balance of $12,000 in its statement of financial position. During the year ended 30 September 20X1, BK charged interest payable of $41,000 to its statement of profit or loss. Accrued interest payable at 30 September20X1 was $15,000.

    Included in the interest charged to profit or loss for the year was an unwinding of the discount on a decommissioning provision of $5,000 and finance lease interest of $3,000. The finance lease is paid in cash annually in arrears.
    What is the cash flow in respect of interest paid that will appear in BK’s statement of
    cash flows for the year ended 30 September 20X1?

    A $30,000
    B $33,000
    C $36,000
    D $38,000

    B/f at 1 october 20×0—12000
    interest charged to p/l-41000
    payment (5000)-unwinding discount on decommissioning provision
    payment-(33000)
    c/f15000

    Answer says that, unwinding discount on provision is an interest expense but not cash flow item.
    This is because usually this interest cost is not paid to other party each year because all interest cost on provision or credited to provision and at the end it is totally paid.Like it is kind of the same as interest expense other than.
    Is this answer of this question?

    Question this part is not clear because it says included charged interest to p/l despite it was mentioned 41000 so illogical from my point of view.Usually both 3000 and 5000 should be inside of 41000
    Included in the interest charged to profit or loss for the year was an unwinding of the discount on a decommissioning provision of $5,000 and finance lease interest of $3,000.

    May 27, 2017 at 3:48 pm #388437
    AvatarMikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23368
    • ☆☆☆☆☆

    The unwinding of a discount involves this double entry:

    Dr Finance costs (in this case Interest Expense)
    Cr Provision

    So there’s no cash involved but it’s part of the $41,000 interest expense taken to Profit or Loss

    Also within the $41,000 is the $3,000 finance lease interest expense but that WAS a cash flow so it is correctly included as part of the $33,000 cash outflow for interest paid

    OK?

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