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Hi Mike, I have a few questions taken from the September’s 2016 paper:
Onerous contract (provision):
Penalty payments, due to the non completion of supply contracts, are estimated to be $200,000, 50% of which is expected to be recovered from the company’s insurers. What provision with regards to this contract is required in the statement of financial position of the company?
Answer:
$200,000, the expected recovered amount of $100,000 should be ignored as there is no certainty that it would be recovered and it would not be netted off against provision anyway.
What if the company is very certain that it would be able to recover $100,000? Would the answer of $200,000 as provision be the same still?
If the company is able to recover $100,000 from its insurer, how should it account for this in its financial statements?
Financial ratios:
Would I be right to calculate the gearing ratio using either of these formulas:
a. Debt / equity
b. Debt / equity plus debt?Hoping to hear from you, thank you 🙂
“What if the company is very certain that it would be able to recover $100,000? Would the answer of $200,000 as provision be the same still?
If the company is able to recover $100,000 from its insurer, how should it account for this in its financial statements?”
Yes, the provision would still be the same – no netting off
If the insurance money were deemed to be virtually certain to be recovered, that would be shown as a receivable
Either ratio is valid but one is gearing and the other is borrowing
Gearing is calculated as Debt / Equity + debt
Borrowing is calculated as Debt / Equity
Do gearing and borrowing mean the same thing- the level of risk arising from debt levels shareholders face from holding shares in the company?
Yes, I suppose so. They are different ways of expressing the same thing
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