Question

Which journal entry relating to the unwinding of discount for an environmental provision is correct?

a. Dr Environmental provision expense (profit and loss) Cr Environmental provision.
b. Dr Environmental provision Cr Unwinding discount Income (Other comprehensive income).
c. Dr Environmental asset (Balance sheet) Cr Environmental provision.
d. Dr Environmental provision Cr Gain from unwinding a provision (profit and loss).

Answer 1

The correct answer is option a. Dr Environmental provision expense (profit and loss) Cr Environmental provision.

Step-by-step explanation:

The correct journal entry for the unwinding of discount on an environmental provision involves recognizing the increase in the provision due to the passage of time as an expense. When a company recognizes a provision for a future liability, such as an environmental clean-up, it may initially measure the provision at the present value of the expected future cash flows. As time passes and the date of the liability grows closer, the discounted amount unwinds, and the provision increases. This increase is recognized as an expense and is known as the unwinding of the discount.

The correct journal entry for the unwinding of this discount would be:

• Dr Environmental provision expense (profit and loss)
• Cr Environmental provision (balance sheet)

This reflects that the company is incurring an additional expense due to the time value of money causing the provision to increase in value, which in turn increases the liability on the balance sheet. Therefore, the correct option is:

• a. Dr Environmental provision expense (profit and loss) Cr Environmental provision.