Skip to content

ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

On 1 January 20X4 Harlow Co recognised a provision for site restoration of $200,000 as part of the cost of a new asset, discounted at 5% from an expected payment date of 31 December 20X6 (3 years). The present value of $200,000 had been calculated using the 3-year discount factor of 0.864, giving $172,800. What is the finance cost (unwinding of discount) for the year ended 31 December 20X4, to the nearest $?

The finance cost is $8,640. The opening discounted provision of $172,800 is unwound at 5%, with the charge going to finance costs and increasing the provision. Applying 5% to the undiscounted $200,000 would be wrong.

  1. A$8,640Correct
  2. B$10,000
  3. C$34,560
  4. D$27,200

Explanation

The provision of $172,800 is unwound at 5% each year. $172,800 x 5% = $8,640, charged to finance costs with a credit increasing the provision to $181,440. $10,000 wrongly applies 5% to the undiscounted $200,000. $27,200 is the total discount, not one year's unwinding.

Did you get it right without looking?

One question tells you little. A timed set on Provisions and contingencies shows your real accuracy, how long you take and where you lose marks.

Practise Provisions and contingenciesFree diagnostic mock

More Provisions and contingencies questions