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Hi Tutor I have question relating provision
Question has been taken from 3 June 2015 past paper
Trial Balance relates to Clarion at 31 March 215
Environmental provision-4000
Note:
Item 1 had a cash cost $14 million, however, the plant will cause environmental damage which will have to be rectified when it is dismantled at the end of its 5 year life.The present value (discounting at 8%) on 1 April 2014 of the rectification is $4 million.The environmental provision has been correctly accounted for, however, no finance cost has yet been charged on the provision.
Solution
Debit asset-4000
credit provisionfinance cost=4000*8%=320
Depreciation=4000/5=800Under statement of financial position:
My question is that if i recognise Provision(4000+320=4320) under non-current liability but why i do not recognise asset(4000-800=3200) under non-current assetIn this question they neither recognised depreciation(800) in p/l nor the asset under SFTP.
Why?
When the provision is created, the double entry is …
Dr TNCA $4,000
Cr Provision $4,000Then as each year goes by the provision is increased by the annual unrolling of the discounted interest
So, in year 1, the amount unrolled is …
Dr Finance Charges $320
Cr Provision $320Now, ask yourself this … “How has that second journal entry changed the figure in the TNCA Account?”
The question tells us that the $4,000 is correctly dealt with ie that amount HAS been included within TNCA and so is subjected to 20% annual straight line depreciation and that figure has been calculated as 20% x $85,000 = $17,000
Is that better?
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