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Hi,
Quick question:
Shawler constructed a furnace on 01 April 03, causing significant environmental damage which must be repaired at the end of the assets useful life of ten years. The present value of this is estimate to be 4 million. Cost of capital is 8 /%.
What is the total finance cost to be recorded in the SPL for the year June 05?
The answer is stated as £320,000 (4 million x 8 %)
I assumed the answer would be based on the provision balance b/fwd in July 04 and not the present value balance at April 03?
Which accounting date are we working towards – 30 June, 2005
But you don’t tell me the date of the present value estimate – may I assume that it’s 30 June, 2005
So the finance cost is 8% of $4 million = $320,000 and the amount to be carried forward as a provision is therefore $4,320,000
In the year to 30 June, 2006 the finance cost will be (assuming change neither in estimated future cost nor in cost of capital) 8% x $4,320,000 = $345,600 and the amount to carry forward at the end of next year will therefore be $4,665,600
OK now?
Incidentally, what was the provision balance brought forward at 1 July, 2004?
Thanks for the response Mike.
The question does not state the date of the present value estimate which is what threw me off.
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