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Dexon’s draft statement of financial position as at 31 March 20X8 shows financial assets at fair value through profit or loss with a carrying amount of $12.5 million as at 1 April 20X7.
These financial assets are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 20X7 the relevant index was 1,200 and at 31 March 20X8 was 1,296.
What amount of gain or loss should be recognised at 31 March 20X8 in respect of these assets?
The answer given by BPP:
$1,000,000 gain [($12,500,000 × 1,296 / 1,200) – Carrying amount $12,500,000]I don’t understand the concept of why carrying amount to be multiplied by year end index and divided by carrying amount index.
The asset increases in value in line with the underlying index
So we need to find by what percentage the index has risen and then apply that percentage to the opening value
A rise from 1200 to 1296 represents a rise of 8% (((1296-1200)/1200)*100)
So applying that 8% rise to the opening value gives us $12,500,000 * 1.08 = $13,500,000
Now, can you see that that multiplicand of 1.08 is just another way of writing 1296/1200?
And that’s why / how we arrive at the answer figure of $13,500,000
If we are looking specifically for the gain, that’s simply 8% * $12,500,000 and that’s an amount of $1,000,000
OK?
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