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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
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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=75377at year end does our provision become 1,507,558 or (1,507,558+75377)?
thank u in advance
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?
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
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.
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