02-14-2009, 05:11 AM
Dear Mr. Aftab,
Although, I understood your scheme but let me explain you this concept.
When a Parent Entity defers some consideration for future payments, it eventually raises its liability as "Deferred Consideration" which should be discounted to reach its present value by using appropriate discount rate. When original amount is discounted in present terms, continuing the above example, future liability of $50m is discounted at $41.32m in present terms, it means that this $41.32m is taken as principle amount and it will yield interest of $8.68m in two years time. So, $41.32m will yield interest of $8.68. Now, if you get through your Inter Commerce or B.Com books you will see a double entry of interest payments but for your convenience I am giving it you here,
Dr Interest Expense===XXX
Cr Liability/CASH======XXX
Now, Debiting Interest Account means Debiting Profit & Loss, next entry would be.
Dr Profit & Loss A/C===XXX
Cr Interest Expense ========XXX
Now, Debiting Profit & Loss means Debiting Retained Earnings which means, as you said, decreasing reserves.
Hence, the entry
DR Reserves===========$8.68
CR Deferred Consideration====$8.68
I hope I have passed my test.
Regards,
Muhammad Amir
Although, I understood your scheme but let me explain you this concept.
When a Parent Entity defers some consideration for future payments, it eventually raises its liability as "Deferred Consideration" which should be discounted to reach its present value by using appropriate discount rate. When original amount is discounted in present terms, continuing the above example, future liability of $50m is discounted at $41.32m in present terms, it means that this $41.32m is taken as principle amount and it will yield interest of $8.68m in two years time. So, $41.32m will yield interest of $8.68. Now, if you get through your Inter Commerce or B.Com books you will see a double entry of interest payments but for your convenience I am giving it you here,
Dr Interest Expense===XXX
Cr Liability/CASH======XXX
Now, Debiting Interest Account means Debiting Profit & Loss, next entry would be.
Dr Profit & Loss A/C===XXX
Cr Interest Expense ========XXX
Now, Debiting Profit & Loss means Debiting Retained Earnings which means, as you said, decreasing reserves.
Hence, the entry
DR Reserves===========$8.68
CR Deferred Consideration====$8.68
I hope I have passed my test.
Regards,
Muhammad Amir
