- This topic has 9 replies, 5 voices, and was last updated 8 years ago by
.
- Posts
As usual, title as above and, as usual, question reproduced below:
“Coate, a public limited company, is a producer of ecologically friendly electrical power (green electricity). Coate’s revenue comprises mainly the sale of electricity and green certificates. Coate obtains green certificates under a national government scheme. Green certificates represent the environmental value of green electricity. The
national government requires suppliers who do not produce green electricity to purchase a certain number of green certificates. Suppliers who do not produce green electricity can buy green certificates either on the market on which they are traded or directly from a producer such as Coate. The national government wishes to give incentives to producers such as Coate by allowing them to gain extra income in this way.Coate obtains the certificates from the national government on satisfactory completion of an audit by an
independent organisation, which confirms the origin of production. Coate then receives a certain number of green certificates from the national government depending on the volume of green electricity generated. The green certificates are allocated to Coate on a quarterly basis by the national government and Coate can trade the green
certificates. Coate is uncertain as to the accounting treatment of the green certificates in its financial statements for the period ended 30 November 2012 and how to treat the green certificates which were not sold at the end of the reporting period.”This question is quite tricky, I don’t understand the double entries of the examiner, I reproduce an extract of his answers, showing the double entries only:
“The journal entry to record the quarterly receipt of the grant is:
DR Certificate (SOFP) $fair value of certificate at receipt
CR Deferred revenue (SOFP) $fair value of certificate at receiptOn the sale of a certificate – this is when its value is realised and the following entries will be posted:
DR Deferred revenue (SOFP) $fair value of certificate at receipt
CR Cost of sale (SOCI) $fair value of certificate at receiptBeing a contribution to the cost of generating electricity.
DR Bank/Receivable (SOFP) $fair value of trade
CR Certificate (SOFP) $fair value of certificate at receipt
DR/CR Revenue (SOCI) $balanceI don’t understand the entry to record the quarterly receipt of the grant
The answers says Dr: Certificate (SOFP), I get this because it’s an asset but what I don’t get is the corresponding credit entry which is Cr: deferred revenue (SOFP). Why show a liability in the SOFP? A liability is defined as “a present obligations as a result of a past event” I don’t see how there is a present obligation here. Why show a liability? And what’s this deferred revenue thing? We got the certificate for free and owe no one any money so why this “deferred revenue liability”?
Thanks,
ME…
“but what I don’t get is the corresponding credit entry which is Cr: deferred revenue (SOFP)”
Because the period to which the certificate relates is in the future so that’s why we defer the recognition of the income
OK?
@mikelittle said:
“but what I don’t get is the corresponding credit entry which is Cr: deferred revenue (SOFP)”Because the period to which the certificate relates is in the future so that’s why we defer the recognition of the income
OK?
But by deferring the income aren’t we effectively recognizing a liability? Why is this liability there?
Because we have received an asset – the credit has got to go to either income or liability. And it’s not income until the next period. Therefore, it’s a liability!
OK?
Dr deferred income Cr cost of sales? The credit reduces the cost of sales as you would expect when the “purchase” price of those vouchers is sponsored by the government
It would be conceptually wrong to credit revenue because it’s not a sale to the government. Rather, it’s the government encouraging by their actions the inclination of Coate to take advantage of the sponsorship gift from the government thus reducing cost of sales
Ok?
Hello, sir, thank you for your explanation on this question.
So whether to book the receipt of certificates to deferred income depends on whether the certificates relates to next period’s production or current period’s production, right?
But according to the question quoted below, it’s likely that the certificates relates to the current period’s production, and therefore there should no be liability related in the future.
“Coate obtains the certificates from the national government on satisfactory completion of an audit by an independent organisation, which confirms the origin of production. Coate then receives a certain number of green certificates from the national government depending on the volume of green electricity generated. The green certificates are allocated to Coate on a quarterly basis by the national government and Coate can trade the green certificates.”
- You must be logged in to reply to this topic.