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Example 4 - Measurement of Provision ▶ On 1 January 2018, SDN Limited acquired a newly constructed oil platform at a cost of $30 million together with the right to extract oil from an offshore oilfield under a government licence. ▶ The terms of the license are that SDN will have to remove the platform (which will then have no value) and restore the sea bed to an environmentally satisfactory condition in ten year's time when the oil reserves have been exhausted. Example 4 - Measurement of Provision ► According to experts' report, the estimated cost of this on 31 December 2027 will be $15 million. The present value of $1 receivable in ten years at the appropriate discount for SDN of 8% is $0.46. (a) Should SDN Limited recognize a provision? (b) Prepare the journal entries for the year ended 31 December 2018 Example 4 - Measurement of Provision (b) Prepare journal entries for Year 1 in ($'000) Date 1 Jan 2018 Oil Platform (30m (15m x 0.46)) Cash Environmental Provision (To record acquisition of oil platform) Finance Cost (6.9m x 8%) Environmental Provision Debit Credit 36,900 30,000 6,900 552 552 (To recognize finance cost on environmental provision) Depreciation expense Acc. Depreciation 3,690 (To provide the depreciation for the oil platform) 3,690

Example 4 - Measurement of Provision ▶ On 1 January 2018, SDN Limited acquired a newly constructed oil platform at a cost of $30 million together with the right to extract oil from an offshore oilfield under a government licence. ▶ The terms of the license are that SDN will have to remove the platform (which will then have no value) and restore the sea bed to an environmentally satisfactory condition in ten year's time when the oil reserves have been exhausted. Example 4 - Measurement of Provision ► According to experts' report, the estimated cost of this on 31 December 2027 will be $15 million. The present value of $1 receivable in ten years at the appropriate discount for SDN of 8% is $0.46. (a) Should SDN Limited recognize a provision? (b) Prepare the journal entries for the year ended 31 December 2018 Example 4 - Measurement of Provision (b) Prepare journal entries for Year 1 in ($'000) Date 1 Jan 2018 Oil Platform (30m (15m x 0.46)) Cash Environmental Provision (To record acquisition of oil platform) Finance Cost (6.9m x 8%) Environmental Provision Debit Credit 36,900 30,000 6,900 552 552 (To recognize finance cost on environmental provision) Depreciation expense Acc. Depreciation 3,690 (To provide the depreciation for the oil platform) 3,690

Individual Income Taxes
Individual Income Taxes
43rd Edition
ISBN:9780357109731
Author:Hoffman
Publisher:Hoffman
Chapter8: Depreciation, Cost Recovery, Amortization, And Depletion
Section: Chapter Questions
Problem 29CE
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Why there will be 552 interest expense of the environemntal provision? Why it will incurred interest by restoring back the sea bed? It doesn't make sense.

Example 4 - Measurement of Provision ▶ On 1 January 2018, SDN Limited acquired a newly constructed oil platform at a cost of $30 million together with the right to extract oil from an offshore oilfield under a government licence. ▶ The terms of the license are that SDN will have to remove the platform (which will then have no value) and restore the sea bed to an environmentally satisfactory condition in ten year's time when the oil reserves have been exhausted. Example 4 - Measurement of Provision ► According to experts' report, the estimated cost of this on 31 December 2027 will be $15 million. The present value of $1 receivable in ten years at the appropriate discount for SDN of 8% is $0.46. (a) Should SDN Limited recognize a provision? (b) Prepare the journal entries for the year ended 31 December 2018
Transcribed Image Text:Example 4 - Measurement of Provision ▶ On 1 January 2018, SDN Limited acquired a newly constructed oil platform at a cost of $30 million together with the right to extract oil from an offshore oilfield under a government licence. ▶ The terms of the license are that SDN will have to remove the platform (which will then have no value) and restore the sea bed to an environmentally satisfactory condition in ten year's time when the oil reserves have been exhausted. Example 4 - Measurement of Provision ► According to experts' report, the estimated cost of this on 31 December 2027 will be $15 million. The present value of $1 receivable in ten years at the appropriate discount for SDN of 8% is $0.46. (a) Should SDN Limited recognize a provision? (b) Prepare the journal entries for the year ended 31 December 2018
Example 4 - Measurement of Provision (b) Prepare journal entries for Year 1 in ($'000) Date 1 Jan 2018 Oil Platform (30m (15m x 0.46)) Cash Environmental Provision (To record acquisition of oil platform) Finance Cost (6.9m x 8%) Environmental Provision Debit Credit 36,900 30,000 6,900 552 552 (To recognize finance cost on environmental provision) Depreciation expense Acc. Depreciation 3,690 (To provide the depreciation for the oil platform) 3,690
Transcribed Image Text:Example 4 - Measurement of Provision (b) Prepare journal entries for Year 1 in ($'000) Date 1 Jan 2018 Oil Platform (30m (15m x 0.46)) Cash Environmental Provision (To record acquisition of oil platform) Finance Cost (6.9m x 8%) Environmental Provision Debit Credit 36,900 30,000 6,900 552 552 (To recognize finance cost on environmental provision) Depreciation expense Acc. Depreciation 3,690 (To provide the depreciation for the oil platform) 3,690
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