On 2 January 2017, White-Stone Ltd. commenced a mining operation. White-Stone Ltd. is required by the terms of provincial legislation to remediate the mine site when mining is completed, likely in 8 years’ time. This means that a provision for decommissioning must be recorded. White-Stone Ltd. estimates that decommissioning will cost $610,000 in 8 years. A reasonable market interest rate is 5%. White-Stone Ltd.'s year end is on December 31. Note: PV tables provided in the textbook. Required: a) Calculate the present value of the decommissioning obligation on January 2, 2017. b) Prepare a table that shows the balance of the obligation for three years (only). Year Opening Net Liability Interest Expense Market Rate Closing Net Liability 2017 a. b. c. 2018 d. e. f. 2019 g. h. i. c) Assume that at the end of 2019, White-Stone Ltd. estimates that the cost of remediation will be $708,500, and that interest rates are now in the range of 7%. Calculate the interest expense for 2019, the new present value, and the adjustment to the obligation for the change in estimates
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On 2 January 2017, White-Stone Ltd. commenced a mining operation. White-Stone Ltd. is required by the terms of provincial legislation to remediate the mine site when mining is completed, likely in 8 years’ time. This means that a provision for decommissioning must be recorded. White-Stone Ltd. estimates that decommissioning will cost $610,000 in 8 years. A reasonable market interest rate is 5%. White-Stone Ltd.'s year end is on December 31.
Note: PV tables provided in the textbook.
Required:
a) Calculate the present value of the decommissioning obligation on January 2, 2017.
b) Prepare a table that shows the balance of the obligation for three years (only).
Year
Opening Net Liability
Interest Expense Market Rate
Closing Net Liability
2017
a.
b.
c.
2018
d.
e.
f.
2019
g.
h.
i.
c) Assume that at the end of 2019, White-Stone Ltd. estimates that the cost of remediation will be $708,500, and that interest rates are now in the range of 7%. Calculate the interest expense for 2019, the new present value, and the adjustment to the obligation for the change in estimates.
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