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in Question 1a the part of “Provision for restoring the damaged factory and acquiring new machinery” in the answer sheet
May i ask why provision has been recognized ?
the question only said prepayment and the double entry is
Dr Asset
Cr PrepaymentBut ‘m not sure how provision has been discussed in the answer sheet
You have misread the Q:
“The company is planning on carrying out the restoration and buying new machinery, at a total estimated cost of $450,000. This amount has been provided for within CURRENT LIABILITIES (i.e. this is the CREDIT), with a corresponding entry accounted for as a prepayment (i.e. this is the DEBIT).”
It’s not clear what you are asking.
If you are asking why has management assumed (meaning “taken on”) the provision the answer is that it shouldn’t have. (It’s not uncommon for management to want to make provisions for future expenses/losses – but provisions are not allowed under IFRS unless there is a liability – hence the risk of misstatement.)
Or do you mean why is the answer discussing the credit $450k as a provision? The Q says “has been PROVIDED” – it could have said “has recognised” or has allowed for – all amount to the same thing. A credit balance has been created in the financial statements for something that is not a liability. What else would you call it other than a provision?
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