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1)Topic: accounting for Associates (group accounts)
Alfred Co bought a 25% shareholding on 31 Dec 20X8 in Grimbald Co at a cost of $38000. During the year to 31 Dec 20X9 Grimbald Co made a profit before tax of $82000 and the taxation charge on the year’s profits was $32000. A dividend of $20000 was paid on 31 Dec out of these profits.
Calculate the entries for the associate which would appear in the consolidated accounts of the Alfred group, in accordance with the requirement of IAS 28.
2) Topic: Provisions
A company knows that when it ceases a certain operation in 5 years time it will have to pay environmental cleanup cost of $5m. The discount rate is 10%. What will be the provision amount for each of the 5 years? What will be total provision after 5 years?q1 Show in SoCI, before “profit before tax” the amount of 12,500 ie 25% of Assoc’s post tax profits.
In SoFP, show cost + share of post acq retained ie cost + 7,500
q2 5m discounted for 5 years at 10% is around 3.125 ( no calculator with me but it’s 5 / (1.1, 1.1, 1.1, 1.1, 1.1)
Each year unroll the discount so after 1st year it will be 3.125*1.1 and after 2nd year it will be 3.125 * 1.1 * 1.1
As each year goes by the double entry will be dr I/S and cr Provision
In the first year the entry would have been dr Asset account ( the one which has given rise to the obligation to clean-up ) and credit provision account
At the end of 5 years, the provision balance will be 5m ( unless the cost of clean-up has risen during that 5 years )
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