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There is one thing I don’t understand with regards to entries.
Suppose the condition is following: Almeyda entered into a sale and repurchase agreement for its head
office on 1 January, selling the office to a bank for $4million. At this
date the office had a fair value of $6million. Almeyda will continue to
use the office for the next 2 years and has the option to buy back to
property for $4.84million, based on an effective interest rate of 10%
per year over the next 2 years. Property prices are expected to
increase over the next 2 years.Can you please write what entries should be when purchasing at 01.01
And what entries at 31.12 should we make?Am I write for the following:
01.01
DR Cash in bank 4 mln
DR Finance expense .840 mln
CR Liability (but what liability ?) 4.840 mln31.12
Here I totally confused.
Hi,
When we sell the head office we record the cash proceeds and a loan liability for the same amount, we cannot recognise the finance cost immediately as the accruals concept prevents us from doing this. The finance costs need to be spread over the period of the loan.
The liability is then treated at amortised cost using the 10%, and if done correctly would give you the $4.8 million at the end of the loan term.
On then repurchasing the head office the loan liability is derecognised.
Thanks
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