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A provision is for dismantling one of Dedlock Ltd’s retail units and returning the site to its original condition.The requirement to do this was a condition put in place by the local government authority when the unit was constructed.The unit was completed on 30 June 2013 and will need to be removed in 10 years’ time.The cost in 10 years’ time of dismantling the unit is estimated at 25000.
The answer is (25000/1.07^10).Why is 1.07 and why do we need to do in this way?
ADD?Dedlock Ltd uses a discount rate of 7% pa necessary to reflect the time value of money in the preparation of the financial statements.
OK!I know?
PV=FV/(1+i)nYes, that’s correct. You would find in the exam that you are given a discount factor to use so that you do not need to calculate it using the above formula.
Once you’ve calculated the PV we DR PPE CR Provision with the PV. The discount is then unwound so every year we DR Finance costs CR Provision.
Hope that helps.
Thanks
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