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 36,900 Credit 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 36,900 Credit 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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 $0.46.
(a) Should SDN Limited recognize a provision?
(b) Prepare the journal entries for the year ended 31
December 2018
Transcribed Image Text:Example 4 - Measurement of Provision
(b) Prepare journal entries for Year 1 in ($'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
36,900
Credit
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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