During the year Gambler acquired an iron ore mine at a cost of $6 million. In addition, when all the ore has been extracted (estimated ten years' time) the company will face estimated costs for landscaping the area affected by the mining that have a present value of $2 million. These costs would still have to be incurred even if no further ore was extracted.
During the year Gambler acquired an iron ore mine at a cost of $6 million. In addition, when all the ore has been extracted (estimated ten years' time) the company will face estimated costs for landscaping the area affected by the mining that have a present value of $2 million. These costs would still have to be incurred even if no further ore was extracted.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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During the year Gambler acquired an iron ore mine at a cost of $6 million. In addition, when all the ore has been extracted (estimated ten years' time) the company will face estimated costs for landscaping the area affected by the mining that have a present value of $2 million. These costs would still have to be incurred even if no further ore was extracted.
How should this $2 million future cost be recognised in the financial statements?
Select one alternative
- Provision $2 million and $2 million capitalized as part of cost of mine
- Should not be recognized as no cost has yet arisen
- Provision $2 million and $2 million charged to operating costs
- Accrual $200,000 per annum for next ten years
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