Tangible NCA - dismantling provision entry

Mmansoor11y ago

First, Good morning MIke.. hope all is well. I am back as i decided not to sit for the f7 in june. so am hitting the books a bit early this time ------------------------------------------------------------------------- my question has to do with the provisioning of dismantling costs. once we have calculated the PV, and calculated the amount to be unwound is the unwound amount added in the FIRST YEAR? SO, 4m cost at 5% over 20 years gives us PV=1,507,558 and year end amount= 5%PV=75377 at year end does our provision become 1,507,558 or (1,507,558+75377)? thank u in advance

MikeLittleTutor11y ago#1

The double entry for the unwinding amount (in your example 75,377) is: Dr Finance Charges in the Statement of Profit and Loss Cr Provision for Dismantling Account Ok?

Mmansoor11y ago#2

so at the end of the year, the provision will 1507558+75377?

MikeLittleTutor11y ago#3

So long as your calculated figures are correct, yes

Mmansoor11y ago#4

the above pertains to the following worked example: an oil rig cost is 10m and dismantling costs wd be 4m in 20 years. Cost of capital is 5%. the example then does the arithmetic and there is one line that i am unable to understand: "Each year, the liability would be increased by the interest rate of 5%." this part i get. its the following i dotn get: "in year 1 this would mean the liability increases by 75388 (making the year end liability 1,507,558)" this is what i dont get. the starting liab is 1507558 and at end of year 1, we shd be adding the 75388 figure. reagrds

MikeLittleTutor11y ago#5

Yes, you're correct. IF you have correctly recorded the opening figure for the provision as $1,507,558 and the cost of capital is 5%, then the closing balance should be 1.05 x $1,507,558 Just check that you have the correct OPENING figure and that you have correctly read the dates within the question.