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Hi im getting confused with unwinding of discount.. the question is:
Cracker Co set up a gas exploration site on 1 January X1 which will operate for five years. At the end of the 5 years the site will need to be dismantled and the landscape restored. The amount required for dismantling and restoration, discounted at the companies cost of capital of 8% is 1.2m and a provision is set up for this amount.
What is the total amount charged to P+L for the year-end 31 Dec X2 in respect of these dismantling and restoration costs?
From what i gather my answer is:
Y1 – 1200 / 1.08 = 1,111
Y2 – 1111 / 1.08 = 1,029
Y3 – 1029 / 1.08 = 953
Y4 – 953 / 1.08 = 882
Y5 – 882 / 1.08 = 817So at the end of X2 the unwinding of the discount should be 1029*1.08 = 82.32
So 82.32 plus the depreciation of 240 (1.2m / 5) = 106.32
The answer though is saying 343,680 and i cannot get my head round it…
help me 🙂
Hi,
The 1.2m is the present value, so you don’t need to do any discounting. You just need to do the unwinding. The provision will be 1.2 x 1.08 = 1,296,000 at the end of 20X1, and so the charge to P/L for the next year is 8% of this amount, which gives 103,680.
Add this to the 240,000 and you have your answer.
Thanks
Hi,
Could you please explain me why we are getting 1.2m as present value and it multiple by 1.08? i dont understand it.
Thank you in advance,
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