Skip to content

CMA Intermediate · Corporate Accounting and Auditing · Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

Dhruv Mining Ltd must restore a site at the end of 3 years at an estimated cost of Rs 6,63,000. The pre-tax discount rate is 10% per annum (present value factor for 3 years = 0.751). At the end of year 1, the provision is carried at the initial present value plus unwinding of discount. Ignoring other adjustments, the finance cost for year 1 recognised in the Statement of Profit and Loss is closest to:

The year 1 finance cost is Rs 49,791. The initial provision is Rs 6,63,000 x 0.751 = Rs 4,97,913, and the increase through unwinding of the discount at 10% is Rs 49,791, recognised as a borrowing cost. Applying 10% to the undiscounted amount would wrongly give Rs 66,300.

  1. ARs 49,791Correct
  2. BRs 66,300
  3. CRs 4,97,913
  4. DRs 5,47,704

Explanation

Initial provision = 6,63,000 x 0.751 = Rs 4,97,913. Unwinding in year 1 = 10% x 4,97,913 = Rs 49,791 recorded as a borrowing (finance) cost. Rs 66,300 wrongly applies 10% to the undiscounted amount, and Rs 5,47,704 is the closing carrying amount, not the charge.

Did you get it right without looking?

One question tells you little. A timed set on Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37) shows your real accuracy, how long you take and where you lose marks.

Practise Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)Free diagnostic mock

More Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37) questions