Provision

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 provision

finance cost=4000*8%=320
Depreciation=4000/5=800

Under 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 asset

In this question they neither recognised depreciation(800) in p/l nor the asset under SFTP.

Why?

| QUOTE May 1, 2017 at 12:27 pm
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MikeLittle

Keymaster
When the provision is created, the double entry is …

Dr TNCA $4,000
Cr Provision $4,000

Then 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 $320

Now, 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?

You mean (81000 +4000=85000)is the whole amount including 4000 of asset under provision?Did i get it right?