Magna is a company that carries out many different activities. It is proud of its reputation as a “caring” organization and has adopted various ethical policies towards its employees and the wider community in which it operates. As part of its annual financial statements, the company publishes details of its environmental policies, which include setting performance targets for activities such as recycling, controlling emissions of noxious substances and limiting use of non-renewable resources. The company has an overseas operation that is involved in mining precious metals.These activities cause significant damage to the environment, including deforestation. On April 1, 2014, the company incurred capital cost of $100 million in respect of the mine and it is expected that the mine will be abandoned in eight years’ time. The mine is situated in a country where there is no environmental legislation obliging companies to rectify environmental damage and is it very unlikely that any such legislation will be enacted within eight years. It has been estimated that the cost of the cleaning the site and re-planting the trees will be $25 million if the replanting were successful at the first attempt, but it will probably be necessary to make a further attempt, which will increase the cost by a further $5 million. The company’s cost of capital is 10%. Requirements: a) Explain why a provision should be made for the cost of cleaning the site b) Prepare necessary journal entries for the period April 1, 2014 – March 31, 2015. Show all workings. c) Prepare the extracts of the financial statements for the year ended 31 March 2015
Magna is a company that carries out many different activities. It is proud of its reputation as a “caring” organization and has adopted various ethical policies towards its employees and the wider community in which it operates.
As part of its annual financial statements, the company publishes details of its environmental policies, which include setting performance targets for activities such as recycling, controlling emissions of noxious substances and limiting use of non-renewable resources.
The company has an overseas operation that is involved in mining precious metals.These activities cause significant damage to the environment, including deforestation.
On April 1, 2014, the company incurred capital cost of $100 million in respect of the mine and it is expected that the mine will be abandoned in eight years’ time.
The mine is situated in a country where there is no environmental legislation obliging companies to rectify environmental damage and is it very unlikely that any such legislation will be enacted within eight years.
It has been estimated that the cost of the cleaning the site and re-planting the trees will be $25 million if the replanting were successful at the first attempt, but it will probably be necessary to make a further attempt, which will increase the cost by a further $5 million. The company’s cost of capital is 10%.
Requirements:
a) Explain why a provision should be made for the cost of cleaning the site
b) Prepare necessary
Show all workings.
c) Prepare the extracts of the financial statements for the year ended 31 March
2015
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