Angel Group Cashflow Question Dec 2013

I’ll need to leave answering this until I get home tomorrow and that will have involved traveling all day today, so I could well leave answering you until Tuesday

But please post again so the thread is seen to be unanswered

Thanks

Hi

Thanks for posting again – it means that I don’t have to try and remember where there’s an unanswered post – I can see straight away that mine is not the last name so there’s more work for me to do

Now, your question! I’m confused. There is a comprehensive explanation in the printed solutions. Is that explanation causing you the problem?

I quote: “The only elements recorded in the financial statements were a charge to revenue for the refurbishment of the building and the receipt of the cash grant, which has been credited to additions of property, plant and equipment (PPE). The building was revalued at 30 November 2013 at $7 million.”

Given the information in that quoted paragraph, are you not comfortable with the concept of writing out the bad entries, writing out the correct entries and then reconciling the two to show yourself the adjusting entries necessary?

If you can do this, I believe that you should more easily arrive at the correct solution

Try it and, as always, if you struggle, post again

Ok, let’s just confirm the “easy” one first.

The company has debited Cash with the $2m received for the grant and credited PPE with $2m

It should have debited Cash with the $2m and credited $1m to retained earnings (set off against the wages expense) and $1m to a deferred income account

To get from first entry to the second one we need to debit PPE $2m and credit $1m to retained earnings (profit before tax) and $1m to deferred income

OK so far?

Now the building.

“The only elements recorded in the financial statements were a charge to revenue for the refurbishment of the building …..” so the company had debited Revenue account with $3 instead of debiting PPE $3m

To correct, debit PPE $3m and credit $3m to Revenue

Now, at the end of the year, revalue the building. It’s being carried at $3m (after our amendment above) and we wish to revalue to $7m

So debit PPE and credit Revaluation Reserve / OCI with the extra $4m

Better?

Of course it’s possible! It’s also possible that you could get a bank reconciliation F3 type question!

If you are asking “What is the chance of getting …..?” well that’s a different kettle of fish altogether.

I doubt very much that there will be a cash flow question in December 2014 P2 examination (I could of course be wrong!)

Ok?

🙂

Thanks! now it’s clear!

@mikelittle said:
Ok, let’s just confirm the “easy” one first.

The company has debited Cash with the $2m received for the grant and credited PPE with $2m

It should have debited Cash with the $2m and credited $1m to retained earnings (set off against the wages expense) and $1m to a deferred income account

To get from first entry to the second one we need to debit PPE $2m and credit $1m to retained earnings (profit before tax) and $1m to deferred income

OK so far?

Now the building.

“The only elements recorded in the financial statements were a charge to revenue for the refurbishment of the building …..” so the company had debited Revenue account with $3 instead of debiting PPE $3m

To correct, debit PPE $3m and credit $3m to Revenue

Now, at the end of the year, revalue the building. It’s being carried at $3m (after our amendment above) and we wish to revalue to $7m

So debit PPE and credit Revaluation Reserve / OCI with the extra $4m

Better?

sir, why is the revaluation of 7m treated first before recognizing the entry adjustments for cash grant i.e DR PPE 2 CR RE 1 CR DEFERRED INCOME 1 ?

and why is the DR PPE not included in year end PPE amount after adjustment instead only increase the amount by7?