In which of the following situations would an entity have a decommissioning obligation? Assume all companies follow IFRS. Question 2 options: a) Kennedy Corp. is constructing a bridge over a creek and a city inspector has indicated that if the creek is damaged, the company will be responsible for the restoration. Kennedy has estimated that there is a 5% chance of damage, and if it occurs, the cost of restoration will be approximately $120,000. b) Salem Cable Co. is in negotiations to build a new distribution facility. Based on the current planned design, the facility is expected to be dismantled in 30 years for $2.5 million. Once the company finds a project manager in the next three months, it expects to sign the final contract for construction. c) Horace Ltd. is developing 80 natural gas wells in a remote area of northern British Columbia. Horace expects that if it were to restore the wells after drilling is complete in four years, it would cost $150,000 per well, as the area is hard to access with machinery. The current environmental regulations do not require restoration due to the location of the wells, and Horace does not plan on restoring the wells. d) Sharpe Industries Inc. completed the expansion of the drainage pond for its factory. There is a legal obligation to restore the land used for the pond to its original condition at the end of the pond’s 22-year useful life. Sharpe estimates that this obligation will cost $6.5 million in 22 years.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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In which of the following situations would an entity have a decommissioning obligation? Assume all companies follow IFRS.

Question 2 options:

Kennedy Corp. is constructing a bridge over a creek and a city inspector has indicated that if the creek is damaged, the company will be responsible for the restoration. Kennedy has estimated that there is a 5% chance of damage, and if it occurs, the cost of restoration will be approximately $120,000.

Salem Cable Co. is in negotiations to build a new distribution facility. Based on the current planned design, the facility is expected to be dismantled in 30 years for $2.5 million. Once the company finds a project manager in the next three months, it expects to sign the final contract for construction.

Horace Ltd. is developing 80 natural gas wells in a remote area of northern British Columbia. Horace expects that if it were to restore the wells after drilling is complete in four years, it would cost $150,000 per well, as the area is hard to access with machinery. The current environmental regulations do not require restoration due to the location of the wells, and Horace does not plan on restoring the wells.

d)	Sharpe Industries Inc. completed the expansion of the drainage pond for its factory. There is a legal obligation to restore the land used for the pond to its original condition at the end of the pond’s 22-year useful life. Sharpe estimates that this obligation will cost $6.5 million in 22 years.

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