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Hi Mike, appreciate your guidance for the following qn.
On 1 Apr X4, Co. commenced drilling for oil from an unexplored part of a country. The extraction of oil damages the environment. Estimation of cost of restoration is $5mil at expiry of 5 yr extraction licence. Additional restoration cost (present value) of $10,000 per mil barrels of oil extracted. Co. extracted 150 mil barrels of oil in the year ended 31 Mar X5. Cost of capital 8% pa and $1 has a present value of $0.68 in 5 years’ time.
What is the total provision (extraction plus dismantling) which Co. would report in SOFP as at 31 Mar X5.
Hi. I got the answer, pls correct if terminology is wrong.
PV of $5m = $3.4m
unwinding interest = $0.272m (8% x $3.4m)Additional cost (PV) = $1.5m
unwinding interest = $0.12mTotal = $5.292m
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