Question

The following have entered into a deed where each party guarantees to each creditor in the Group payment in full of any debt upon winding up.
 Unicorn Pty. Limited
 Uniwing Pty. Limited
 Freewill Group Limited
 Tornado Pty. Limited
 ChopChop Pty. Limited
Unicorn Pty. Limited had just taken a $4 million loan from Westpac Bank. There is no indication of any default on loan.
Required:
a)Discuss whether the loan Unicorn Pty. Limited took can be recognise as a liability on the Statement of Financial Position of the other entities included in the deed.

Accounting equation is Asset = Liabilities + Owner’s equity.
An accounting student approached you to seek advice. She would like to know if a business transaction can affect only the left side of the accounting equation.
Required:
b) Discuss whether or not a transaction can affect only the left side of the accounting equation.
If so, give an example and provide journal entry.

Answer 1

A) No the loan taken by Unicorn Pvt ltd will not appear as a libility in the statement of financial positions of the other entitites included in the deed as guarantee is only provided in case of winding up and is a kind of contingent liability . Even the loan taken by Unicorn ltd is sound there is no expectation of any default.

B) Yes there are transactions which only affect one side of accounting . It can be left or right side. In case of left sides where assets appear transactions that lead to increase in one asset and decrease in other will affect only left side of accounting . For example

Company prepays its insurance $200

Journal entry

Prepaid insurance a/c......Dr .$200

To cash . $200