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hello! i’ve been doing this question sycamore co from the may/june 2015 past paper and there are a few things i’ve not been able to understand, can you please explain me the following –
– why does the loan borrowed be have to split between current and non current liabilities? isn’t it just a non current liability since its a 10-year loan? or is it because sycamore could have borrowed SOME amount of that $2 as a loan repayable by the year end and the rest of it repayable after 10 years?
– why would sales made have to be removed from the draft financial statements? according to my understanding, they had been made before the year end and so they belong to the year 20X5 while the sales returns had happened after the year end and so they should be recorded in the next year. i had identified a risk that they had been overstated since there were so many sales returns happening but i did not know how to explain it cause you cannot be creating a provision for sales returns
Read the question: “is due for repayment OVER a ten-year period” – i.e. by instalments.
It would be more normal for any loan to have it repaid in this way rather than entirely in a lump sum at the end of the loan – if this was was the case and relevant the question would make clear that repayment was at the end, e.g. “IN ten year’s time”.These are the entries that will have been made:
Before the y/e:
Dr Receivables and Cr Sales (as normal for a sale)
After the y/e:
Dr Sales and Cr Receivables (as normal for a sales return)But if the returns are, for example, because the customer never ordered the goods, it means the entries before the y/e will have to be reversed. This is not creating a provision – it is saying that the sales weren’t really sales. ALSO, since goods will have gone out before the y/e and therefore could not have been included in physical inventory, the COST of the inventory will also have to be adjusted (i.e. increase asset amount of inventory in SoFP and decrease cost of sale in SoPL).
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