Question

Sleech Ltd operates an information systems company. The firm is preparing its 30 June financial statements, and requires advice concerning the proper treatment of the following situations. Explain how to deal with each situation, and prepare any required journal entries.

The finance minister of a foreign country in which one of its subsidiaries is located, T.G. Cee, has informed Sleech Ltd of her government's intention to expropriate funds from the subsidiary. T.G. Cee indicates that the best outcome Sleech Ltd could expect is to receive 60 per cent of the fair value of the subsidiary's property as settlement. The carrying amount of the (wholly owned) subsidiary is $12 900 000 and the estimated fair value is $15 000 000.

Answer 1

Ans : Loss from expropriation A/c. $ 39,00,000

To allowance for expropriation $ 39,00,000

[ $ 1,29,00,000 - ( 60% x $ 1,50,00,000)]

An entry to record a loss and establish an allowance due to threat of expropriation necessary because expropriation is imminent as evidenced by the foreign government's communicated intent to expropriate and the prior settlement for properties already expropriated. That is enough evidence exists to reasonably estimate the amount of the probable loss resulting from the impairment of assets at the balance sheet date. The amount of loss is measured by the amount that the carrying amount ( book value) of the assets exceeds the expected compensation. At the time the expropriation occurs the related assets are written off against the allowance account.