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Hi,
Per TB
P&E at cost: $77K
Right of use plant: $8K
Accumulated depreciation P&E (1/4/14): $19KNote: Included in the PPE is an item of plant with a cost of $14m. Plant cause envi damage dismantled at end of 5yrs life. The PV of rectification (dismantling cost discounted at 8%) on 1/4/14 is $4m.
Depreciation charged to COS on straight-line basis over 5 years life. No plant is more than 4 years old.
Q1: Why is the depreciation on the answer sheet is taken as 20% of the total cost of asset, Making the depreciation charged to COS is 17K
Initially what i did was:
Cost: 85K – accmulated dprctn: (19K) = $66K
Dprciation for the year (85K/5 years UL) = ($17K)
Carrying amount of asset at y/e: $49KThen i got confused because of the mentioned 4 years limit
Q2: What do they mean when they say “no plant is more than 4 years old”? What am i supposed to do with this information?
Q3: In what circumstances do we need to unwind the discount cost? Is 8% x $4m is called the unwinding of the discount cost?
The dismantling cost should be capitalised in the asset right so wouldnt the asset carrying amount be $14m cost of asset + Pv of the dismantling cost $4M = $18m
and then asset should be depreciated by the value over 5 or 4 years?However in the answer sheet theres no account of this because i suppose in the note they mentioned that envi provision has been correctly accounted for, just the finance cost has not been charged to provision. So means in CL (B/S) provision: PV $4m + finance cost of provision which we need to work out being (8% x PV $4m:) $0.4m
Total envi provision: $4.4m rightAlso just wondering do we need to treat the $14m separately from the total P&M? when is the circumstance t becomes a separate asset? is it when it is constructed? right to use?
Q5: How do we know that the $14m was the new asset purchase? (which would later be included in the SOCF investing activities. I literally wouldn’t know by reading from that line alone. Or is it we must directly assume since it mentioned, so there must be something.
Hi,
Q1. If the plant has a life of five years then this is equivalent to 20% on cost.
Q2. It means that all the remaining assets need to be depreciated, if they were over five years old then they will have been fully depreciated and hence we’d need to remove them from the calculation of the depreciation charge for the year.
Q3. When we have discounted something back to present value we then need to grow it up to its final value, so we apply the interest to the outstanding liability/provision each year.
Q4. If they say it has been correctly accounted for then the $14m is the cost plus the present value of the environmental provision, which is then depreciated.
Q5. If it says that the cost is $14m then we have to assume that it is the purchase of a new asset. There isn’t anything else otherwise to indicate that it isn’t.
Thanks
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