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According to the open tuition note pg 155 i don’t really understand why the journal entry would be as follows:
Dr cash
Cr Income
Cr AssetCould you explain further ?
Although we are receiving $2,400 this year there is an expectation that, in the long run, the return will only be 4% and not 6%. By writing down the asset instead of taking the full $2,400 to statement of profit or loss we are anticipating the reduction in the value of the asset as a result of the forecast difficulties that our borrower will face in the future
Is that better?
why we should credit the assets instead of recognised in allowance account?
Isn’t because of the “2%” is confirmed gone, then we should direct charge to asset account?
Hmmmm, good question.
I think that I can only suggest that it’s a question of prudence / caution. As accountants, we are taught to “always look on the dark side of life” (de dum, de dum, de dum de dum de dum) (sorry – I couldn’t resist it!)
That’s why we value inventory at the lower of cost and net realisable value. It’s why we provide for a liability that is more likely than not (say 51%) to crystallise but we only disclose an asset that is say 94% probable
In the above scenario (I’ve forgotten the precise wording of the question) doesn’t the question indicate probability of non-collectability? And doesn’t it lead you to thinking that the probability is greater than 50% that we won’t collect?
This is the question
The actual and effective rate of return is 6% but there is an element of doubt about the
continuing viability of the investee entities and, although there has been no default this year, it is considered likely that the actual rate of return in the long run will be only 4%.the key word is “considered likely” right?
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