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- May 29, 2022 at 10:34 am #656777
Hi, I have a question regarding this exercise: Clarion from Kaplan kit
Property, plant and equipment
Included in property, plant and equipment is an item of plant with a cost of $14 million
purchased on 1 April 20X4 However, the plant will cause environmental damage which
will have to be rectified when it is dismantled at the end of its five year life The present
value (discounting at 8%) on 1 April 20X4 of the rectification is $4 million. The
environmental provision has been correctly accounted for, however, no finance cost
has yet been charged on the provision.
No depreciation has yet been charged on plant and equipment which should be
charged to cost of sales on a straight?line basis over a five?year life No plant is more
than four years old
The dismantling cost is not capitalized in PPE.
However on a similar MCQ,
On 1 July 20X4, Experimenter opened a chemical reprocessing plant. The plant was due to be
active for five years until 30 June 20X9, when it would be decommissioned. At 1 July 20X4,
the costs of decommissioning the plant were estimated to be $4 million in 5 years’ time
Experimenter considers that a discount rate of 12% is appropriate for the calculation of a
present value, and the discount factor at 12% for five years is 0.567.
What isthe total charge to the statement of profit orlossin respect of the decommissioning
for the year ended 30 June 20X5?
In this exercise, if you want to arrive at the correct answer you must capitalize the decommissioning cost.
Which one is the correct answer and why ?
Thank you so much for your helpMay 31, 2022 at 8:53 pm #657006Hi,
We capitalise the decommissioning costs at their present value (DR PPE CR Provision).
The cost of the asset is then depreciated over its useful life. The provision is unwound to its terminal value over the same period.
In profit or loss there will therefore be an annual depreciation charge and the finance cost.
Thanks
June 1, 2022 at 5:12 am #657026Thank you so much.
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