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Hey there,
So i was doing this question “ROD” (Q.30) from BPP’s Kit.
I came across this weirdest adjustment :
Let me present you with the data:
Changes in fair value if plan assets
Opening Fair value of plan assets: Nil
Expected Return on plan assets: $10m
Contributions: $100m
Acturial Gain (Bal. Figure) : $15m
Clos. fair value of plan assets: $125m
…
a) Now the directors of the company didn’t know how to treat it,they simply treated the “Contributions” ($100m) as “Receivables” in SOFP.
b) Plus they wanted the Actuarial gains ($15m) to be recognized.
..
Now BPP’s rectifying entry is (you can check it from the KIT aswell) :
DEBIT Retained Earning $105m CREDIT Receivables 100m CREDIT Def.Benefit Plan $5m
..
I believe, the entries should have been:
DEBIT Def.Benefit Plan $100 CREDIT Receivables $100m;
DEBIT Actuarial Gain(Recognized) $15m CREDIT Income Statement $15m.
..
Am i right? or is there something else to this?.dude u r very wrong i did this question last nite so lemme tell ya how its supposed to work.. and also plz dont follow bpp but kaplan for p2 !!
there are NO PREVIOUS DBOs, and the company starts one this year only.. and so we need to book a liability with the amount.. THEREFORE DEF BEN PLAN cant! be debitd but it will be a credit in non current liab.
next, acturial gain of 15 reduces our NET ExPENSES CHARGED TO PROFIT / LOSS bcz a GAIN would offset the charge.. so 120 are net expenses charged and that is reduced by 15, rest charged to income statement..
REC will be credited by 100 YESI got what what you said.
Just one question: (since you have seen the question)
Why the retained earnings are Debited (reduced) with $105..?To me only the “Actuarial gains” i.e $15 should be charged to Retained Earnings.
As for the “Contribution” issue,the question states that those dumb director took it as for “Receivables”. in other words they made a entry:
DEBIT Receivables CREDIT Cash.
When the actual entry should have been:
DEBIT Def. Benefit plan CREDIT Contributions.So in nutshell, even if we correct this “Contribution” issue, it shouldn’t be reducing (or have any effect) on retained earnings.
I hope you reply back.I hate when this question confuses me. 🙂
The correct entry when the plan was started should have been
Dr Plan assets, Cr General cash
So to correct we need to Dr Plan assets and Cr receivables
At the start of the scheme, an actuary would have calculated the pv of the future oblig of 100. This 100 should be charged against profits through the I/S
Carry forward for assets is 125 and for obligations is 13 and the directors want to recognise any gains immediately. Expected return on plan assets is 10% x 100 =10 double entry Dr Plan assets Cr I/S
Actuarial gain on plan assets of 15 – double entry Dr Plan assets Cr I/S
Current service cost 110 – double entry Dr I/S Cr Pv of FO
Interest cost 20 – double entry Dr I/S Cr Pv of FO
In summary, in one single double entry after we have transferred the 100 from Receivables into Plan assets, we have:
Dr I/S ( 110 + 20 – 10 – 15 ) = 105
Dr Plan assets ( 10 + 15 ) = 25
Cr Pv of FO ( 110 + 20 ) = 130Ret ears are debited with 105 because that’s the net cost of the scheme this year ( 110 csc + 20 ic – 10 eropa – 15 actuarial gains )
To me only the “Actuarial gains” i.e $15 should be charged to Retained Earnings. in your post. Actuarial gains would never be [url=https://]charged[/url] in the I/S – they would be credited, but surely never debited
Again you have posted
DEBIT Receivables CREDIT Cash.
When the actual entry should have been:
DEBIT Def. Benefit plan CREDIT Contributions.
That entry cannot make sense! ( sorry! ) For example, what’s your technique of getting 100 out of receivables? And where’s your entry for the 100 cash paid?
I believe that if you work through my ( more ) detailed solution, you should find that it pretty much coincides with BPPs
Hope that helps
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Can someone calculate the depreciation on he new purchase of 50m trade disc of 6m and explain it to me?
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Thanks for yor answer. But that’s not what the book says for this question.
Can you take a look and reply.Thanks
We should be depreciating on the basis of 44. We have depreciated on the basis of 50. So we have depreciated 1/6 of 6 too much. In addition, we have credited I/S by 6. Therefore we need to deduct the 6 from the ret ears and add back the 1 excess depreciation. that gives us a NET adjustment of 5 charge to the income statement and the credit of 5 goes to TNCA
In summary
Dr I / S 5
Cr TNCA 5In full,
Dr I / S 6
Cr TNCA 6
thereby correcting the bad credit and reducing instead the TNCAand then
Dr TNCA 1
Cr I/S 1
with the overcharged depreciationBPP have made a short cut
Hope that’s better
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Thank you! That does help.
Saima
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