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Dear Sir,
I have encountered a difficulty in understanding March/June 17 Q.1a pt 5 – Bonds
In the double entry of the answers workings, there is $7m loss on disposal. Can you kindly tell me how did the examiner arrived at the $7m loss.
Moreover, if it is is a loss, why is it on the credit side instead of the debit side of RE (to reduce RE)?Shouldn’t the loss be $3m (being the FV @ date of disposal i.e. $38m less the consideration received, being $35m)?
I didn’t understand this part of the question, kindly assist.
Thanks and regards,
Marylise SaccoHi,
The question specifically states that a loss of $7m has been recorded, presumably this is because we only received $28m for the bonds given the carrying value was $35m. The fair value is not used in calculating the loss on disposal, a profit/loss on disposal is calculated as proceeds less carrying value.
As this loss is not a true loss given we are treating the sale as a secured loan, then it needs to be removed from profit and loss/retained earnings. To remove the loss then we will credit the profit and loss/retained earnings.
Hope this helps.
Thanks
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