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Morning Chris,
Really struggling with these application type questions.
On 30 June 20X1 Swann sells its head office which had a carrying value of $10 million for $4 million. The fair value of the property at this date was $12 million. Swann can repurchase the asset in 5 years’ time for $5 million. Property prices are expected to remain stable in the near future. The useful life of the asset is 30 years at the date of sale. Which one of the following best describes the correct accounting treatment to deal with this transaction as at 30 June 20X1?
Options
1.Swann should derecognise the asset and record a loss on disposal immediately in profit and loss
2.Swann should derecognise the asset but should defer the loss on disposal over 5 years.
3. Swann should not derecognise the asset but should record a liability of $5 million in the statement of financial position
4. Swann should not derecognise the asset and but should record a liability of $4 million in the statement of financial position
I thought the answer was 1. because sale is less than carrying value.. we would immediately expense the loss to the p&l. the answer is 4 but I am really struggling to understand why? the solution says 4.
isit maybe the question does not say anything about that is the accounting treatment with this sale on the financial statements?
Hi,
This is testing a sale and repurchase agreement.
As we’ve sold it and have the option to repurchase it at below market value in the future we would therefore buy it back. If we are going to buy it back then in substance it will still be our asset and so we should therefore continue to recognise the asset in our books. In substance the proceeds of $4 million are a secured loan, with the security being the head office itself.
Although it doesn’t say in the question we probably still have the right to use the head office which would further indicate that we have the risk and rewards of ownership and so continue to recognise the asset.
Don’t panic if you get these type of questions wrong. The key is to learn from them if you get them wrong. Question practice is the key to success in any exam.
Thanks
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