Section B - Case 2: TidalWave Energy

TidalWave Energy has a legal obligation to decommission the tidal lagoon at the end of its 20-year life. The present value of this obligation on 1 January 20X4 was $2,500,000. The discount rate is 5%.

What is the double entry to record the unwinding of the discount on this provision for the year ended 31 December 20X4?

Answer options:

Debit Property, Plant and Equipment $125,000; Credit Provision $125,000

Debit Finance Cost $125,000; Credit Provision $125,000

Debit Provision $125,000; Credit Finance Income $125,000

Debit Operating Expense $125,000; Credit Provision $125,000

How to approach this question

Calculate the interest (discount rate * present value). Recognize this as a finance cost in P&L and increase the liability (provision).

Full Answer

B.Debit Finance Cost $125,000; Credit Provision $125,000✓ Correct

The unwinding of the discount reflects the passage of time and is recognized as a finance cost. Amount = $2,500,000 × 5% = $125,000. Double entry: Debit Finance Cost (Profit or Loss) $125,000; Credit Provision (Statement of Financial Position) $125,000.

Common mistakes

Capitalizing the unwinding of the discount into the cost of the asset.

Question 24 All questions Question 26

Practice the full ACCA FR — Financial Reporting Practice Exam 6

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