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Hi Mister,
I am a bit confused about the finance cost journalisation when it is unwound.
Here is the information:
P purchased S two years ago, apart from the cash payment and addition share issuing, it agreed to pay a futher $500K in three years’ time. Current interest rates are 10% pa. The discount factor for three years is 0.751.
So the question requires us to prepare current year’s consolidation. In the unwinding of discount section, the working is like below:
Present value of deferred consideration of acquisition $376K
Present value of deferred consideration of reporting date $455K
The difference is $79K
Then it says:
Dr Finance costs (SPorL) $79K
Cr Deferred consideration liability $79KThis I am not sure. I was thinking shouldn’t this $79K be the two years’ unwinding finance costs? On a accrual basis, shouldn’t the finance cost only contain the second year’s instead of two years’ total? I mean surely at the end of the first year, when P prepared the group’s consolidated states, it should have charged the first year’s unwinding finance cost to the SPorL?
Where am I wrong here?
Thank you
No, I agree with you. The only justification for the entry you have quoted is that the first year’s unwinding was not done and is therefore now being corrected in year 2. However, in my view, that looks like the correction of a fundamental error and should be treated as a prior year adjustment
IF the question were asking you the value of the obligation at the end of year 2 then I can see the reason for showing you the working. However, it would still have been better presentation to show the obligation as at the end of year 1 as 376 + 37 = 413 and
at the end of year 2 show as 413 + 41 = 454 (rounded)- Topics: 43
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@mikelittle said:
… However, in my view, that looks like the correction of a fundamental error and should be treated as a prior year adjustment…
Hi mister,
Then how to make the journal of prior year adjust should it look like the correction of a fundamental error?
Thanks.That’s what I think, yes.
Correct the retained earnings and the obligation brought forward – these will be reflected in the comparative figures for this year and within the statement of changes in equity as well as a full detailed explanation within the notes to the financial statements
Ok?
- Topics: 43
- Replies: 124
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So:
Dr Retained Earnings $79
Cr Non-current liabilities – deferred finance cost $79
Is this corrent? I am a bit daft. Thanks.@mikelittle said:
That’s what I think, yes.Correct the retained earnings and the obligation brought forward – these will be reflected in the comparative figures for this year and within the statement of changes in equity as well as a full detailed explanation within the notes to the financial statements
Ok?
No. Deal with the 37 first – reduce retained earnings brought forward and do that through the statement of changes in equity as a correction of a fundamental error. The double entry will be added on to the obligation brought forward. The entire correction will be reflected in revised amounts shown as this year’s comparative figures
Then deal with the 41 – the entry this year would be debit finance charges in the statement of profit or loss and credit the obligation
Sure, the net effect is to reduce the retained earnings by an aggregate of 78 and an increase in the obligation by that same 78 but the two separate elements (37 and separately 41) should be dealt with differently rather than by just one single composite entry
Ok?
- Topics: 43
- Replies: 124
- ☆☆
Okay, I understand now. Thank you.
@mikelittle said:
No. Deal with the 37 first – reduce retained earnings brought forward and do that through the statement of changes in equity as a correction of a fundamental error. The double entry will be added on to the obligation brought forward. The entire correction will be reflected in revised amounts shown as this year’s comparative figuresThen deal with the 41 – the entry this year would be debit finance charges in the statement of profit or loss and credit the obligation
Sure, the net effect is to reduce the retained earnings by an aggregate of 78 and an increase in the obligation by that same 78 but the two separate elements (37 and separately 41) should be dealt with differently rather than by just one single composite entry
Ok?
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