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- August 13, 2021 at 8:52 pm #631499
Dear Chris,

How are you?

I hope you are doing well,I would like to thank you for your nice explanation and your appreciated effort,

I’m regarding to capitalisation of the dismantling costs,

1- How can we settle the liability of initial asset capitalization?

2- How we can accumulate the liability of each year to the initial liability?Thank you in advance.

August 14, 2021 at 12:56 pm #631558In other words, we have an example in Kaplan Textbook it says,

Given information as follows,

Cost of an assets =$10,000,000

Dismantling cost =$4,000,000 over 20 years,

so the cost of the P.P.E equals to the initial cost plus the dismantling cost at its present value

So, the present value of the dismantling cost =1,507,557

So the total cost of the P.P.E= $10,000,000 + 1,507,557

= $11,507,557

So, we are going to recognize the cost of the P.P.E into our accounts through the following entryDr P.P.E (SFP) $11,507,557

Cr Bank (SFP) $10,000,000

Cr Liability (SFP) $1,507,557 we should create a new account for such liability in the chart of accounts.

after that by the end of the year we are going to do two journal entries,

1- the first journal entry to record the annual depreciation

2- the 2nd journal entry to record the liability that would increase each year for instance the interest rate is 5%

So, the annual depreciation expense = $11,507,557 / 20 years

=$575,378.

the Journal entry as follow to record the depreciation,

Dr Depreciation expense (SPL) $575,378.

Cr Accumulated depreciation (SFP) $575,378.The increase in the liability each year should be written-off to profit or loss statement

the first year liability increase= $1,507,557* 5%

=$75,378

so the Journal entry,

Dr Interest Expense (SPL) $75,378

Cr liability (SFP) $75,378

the new liability balance = $1,507,557+$75,378

=$1,582,935

my questions are as follow,

1- Could you check out my workout and tell me what is wrong and correction if possible,Please?2- Is the 2nd year liability is going to be calculated for the new balance of the liability as follow

=$1,582,935*5%= $79,146.75

so the balance of the liability at the end of the year is going to be as follow

= $1,582,935+$79,146.75

= $1,662,082 and so on,3- the 3rd is how can we settle the amount of the liability which is presented in the face of the financial position?

Thank you in advance.

August 19, 2021 at 10:01 pm #632263Hi,

What you’ve done is excellent and all correct, demonstrating a solid understanding of the concept. This also includes the treatment for the second and subsequent year.

What should happen is that if you continue this treatment for 20 years then the provision will finish up being $4 million. this is the point at which the payment is due and so we would CR Bank DR Provision.

Thanks and great work.

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