Question

The following are the details found by Hind from the books of Al Ahlia LLC. Cash RO 1,000,000 Receivables RO 150,000 Debtors RO 150,000 Plant RO 800,000 Machinery RO 400,000 Furniture RO 200,000 Current debts RO 600,000 Long term loans RO 800,000 Debentures RO 200,000 Owner’s Equity RO 1,100,000 The current price index is 280The plant and machinery and long term debt were acquired when price index was at 180. You are required to revise the summary balance sheet to restate equity in terms of current value of Rial.   

Answer 1

Revised Balance sheet

Assets	$[RO]	Liabilities and shareholder's equity	$[RO]
Cash	1,000,000	Current debts	600,000
Receivables	150,000	Long term loans	1,244,444
Debtors	150,000	Debentures	200,000
Plant	1,244,444	Owners equity	1,322,222
Machinery	622,222
Furniture	200,000
	3,366,666		3,366,666

Revised value of Plant = $ 800,000 X 280/180 = $ 1,244,444

Revised value of machinery = $ 400,000 X 280/180 = $ 622,222

Revised value of long term debts =$ 800,000 X 280/180 = $ 1,244,444

Shareholders equity = $ 1,100,000 + Net effects of revised value due to price index change ]

= $ 1,100,000 + [ { $ 1,244,444 - $ 800,000} + { $ 622,222 - $ 400,000} - { $ 1,244,444 - $ 800,000}]

= $ 1,100,000 + $ 222,222 = $ 1,322,222

Note : Due to price index change, there will be no effect on fixed interest bearing debt like debenture.

But price index increase the outstanding of floating interest debts like long term loans. Long term loans doesn't have a fixed rate of interest over the life of the instruments.