Question

Hill Incorporated purchased metal to build a new roller coaster on December 31, 2020. Hill provided a $500,000 down payment and agreed to pay the balance in equal instalments of $340,000 every December 31 for five years. Hill could have received a loan from the bank for this amount at 9% interest.

1.Prepare the journal entries that would be recorded for the purchase and for the payments and interest on December 31, 2020, 2021, 2022, 2023, 2024, and 2025.

Answer 1

(As per the treatment given by IFRS-9)

Working note: Calculation of amount of financial liability to be recognized

Year	Contractual Cash flows	Present Value Factor	Present Value
21	320000	0.917	293577.98
22	320000	0.842	269337.60
23	320000	0.772	247098.71
24	320000	0.708	226696.07
25	320000	0.650	207978.04
		Total	1244688.40

Working Note: Calculation of Interest expense

Year	Opening balance	Payment during the year	Interest @9%	Principal
21	1244688.40	320000	112021.96	207978.04
22	1036710.36	320000	93303.93	226696.07
23	810014.29	320000	72901.29	247098.71
24	562915.58	320000	50662.40	269337.60
25	293577.98	320000	26422.02	293577.98

Following are the journal entries for the transaction:

31-Dec-20	Raw Material A/c Dr		1744688.40
		To Bank A/c		500000
		To Financial Liability A/c		1244688.40
31-Dec-21	Interest Exp A/c Dr		112021.96
		To Financial Liability A/c		112021.96
31-Dec-21	Financial Liability A/c Dr		320000
		To Bank Account		320000
31-Dec-22	Interest Exp A/c Dr		93303.93
		To Financial Liability A/c		93303.93
31-Dec-22	Financial Liability A/c Dr		320000
		To Bank Account		320000
31-Dec-23	Interest Exp A/c Dr		72901.29
		To Financial Liability A/c		72901.29
31-Dec-23	Financial Liability A/c Dr		320000
		To Bank Account		320000
31-Dec-24	Interest Exp A/c Dr		50662.40
		To Financial Liability A/c		50662.40
31-Dec-24	Financial Liability A/c Dr		320000
		To Bank Account		320000
31-Dec-25	Interest Exp A/c Dr		26422.02
		To Financial Liability A/c		26422.02
31-Dec-25	Financial Liability A/c Dr		320000
		To Bank Account		320000

Further, in case the company Hill Inc. considers the interest expense (finance cost) as an important and crucial factor for the roller coaster business, the interest may be capitalized in the cost of Raw Materials / Property Plant and Equipment.

Otherwise, the same may be written off in Statement of Profit and Loss