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sir i have a little difficulty in understanding what the question says like for ques 1 for june 2013 adjustment no 4 the last line says ” The only accounting entries which have been made for the year ended 31 May 2013 are the cash entries for the loan and interest received which have resulted in a balance of $48·5 million being shown as
a financial asset.” so wont we credit the financial asset with 48.5 to remove this asset nd den record it at closing balance of 47.25?like wise adjustment no 7 says “The above figures have not been taken into
account for the year ended 31 May 2013 except for the contributions paid which have been entered in cash and the defined benefit obligation.”” wont this imply that an obligation for 6 have already been recorded in the balance sheet??please help me clear this as im finding it highly confusing
thanks alott for ur effor nd timeHi,
Essentially the examiner is giving you the information about what has been done by the company, so that you can then make the correcting entries.
It is like looking at a much more complicated version of an errors question from F3. To solve errors questions we looked at three things:
1. What has been done (which is what the examiner is telling us in the question)
2. What should have been done (which is what you need to think about using your knowledge of IFRS)
3. What do we need to do to correct (which is what you need to record in your answer)If you think along these lines then it should help.
So if we look at the first scenario you mention then given they’ve recorded the cash entries they’ve DR Financial assets CR Bank with the $50 million. Is this correct? No, because we need to record it at fair value, using the 6% as a discount rate. We therefore need to correct it.
They’ve also recorded the interest received, so will have DR Bank CR Financial asset with $1.5 million (3% x $50 million) as that is how the financial asset is now at $48.5 million. Although this is correct they have not accounted for the effective interest on the loan, as don’t forget this is a financial asset at amortised cost. So we need to record the effective interest on the loan.
I’ll let you have a think about then what they should have done and how to correct it as it will help you understand things ready for the exam.
In the second scenario it is again saying what has been done, in that they will have DR Pension obligation CR Bank with the $2 million. This is correct but they have then not accounted for any interest, return on assets, service costs or remeasurement gain/loss, whihc is what should have been done. You would therefore need to account for these to ensure it is all fully accounted for.
Thanks
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