Quarry Ltd. is a mining company with several locations throughout Europe. Since its inception, they have always abided by the regulations of the various countries. With the introduction of Sustainability reporting, the board is currently discussing what should be included in their financial statements. They firmly believe that if they were to include details on preservation policies such as zero tolerance for pollution, conservation of wildlife, reforestation and recycling, their reputation would be enhanced. This is very important to them since their activities cause significant damage to the environment, including deforestation. They are eager to come to a consensus especially since they have never embarked on such activities. On January 1, 2015, Quarry Ltd. acquired the rights to mine a site at a cost of $200 million. The site is expected to be decommissioned in 30 years from the date of acquisition. At the end of the 30 years, there is no residual value and legislation requires Quarry Ltd to decommission the site once mining operations are completed. After 1 year of site preparation, the mine became operational as of January 1 2016. The mine is situated in a country where there is no environmental legislation obliging companies to rectify environmental damage and it is very unlikely that any such legislation will be enacted within 30 years. It has been estimated that the cost to decommission the mine is $50 million. The cost of restoring the site will be $30 million. The company’s cost of capital is 7% and its year end is December 31st . Quarry Ltd uses straight line depreciation for its non-current assets. Mining operations ended as scheduled and the costs to decommission and restore the site in 2045 were $55 million and $20 million respectively. Requirements: a) Explain if a provision should be made for: (i) the decommissioning of the mine and (ii) the cost of restoring the site. b) Prepare the necessary journal entries for the years ended December 2015 & 2016 Show all workings. c) Prepare the journal entries for year ended December 31, 2045 Show all workings

Quarry Ltd. is a mining company with several locations throughout Europe. Since its inception, they have always abided by the regulations of the various countries. With the introduction of Sustainability reporting, the board is currently discussing what should be included in their financial statements. They firmly believe that if they were to include details on preservation policies such as zero tolerance for pollution, conservation of wildlife, reforestation and recycling, their reputation would be enhanced. This is very important to them since their activities cause significant damage to the environment, including deforestation. They are eager to come to a consensus especially since they have never embarked on such activities. On January 1, 2015, Quarry Ltd. acquired the rights to mine a site at a cost of $200 million. The site is expected to be decommissioned in 30 years from the date of acquisition. At the end of the 30 years, there is no residual value and legislation requires Quarry Ltd to decommission the site once mining operations are completed. After 1 year of site preparation, the mine became operational as of January 1 2016. The mine is situated in a country where there is no environmental legislation obliging companies to rectify environmental damage and it is very unlikely that any such legislation will be enacted within 30 years. It has been estimated that the cost to decommission the mine is $50 million. The cost of restoring the site will be $30 million. The company’s cost of capital is 7% and its year end is December 31st . Quarry Ltd uses straight line depreciation for its non-current assets. Mining operations ended as scheduled and the costs to decommission and restore the site in 2045 were $55 million and $20 million respectively. Requirements: a) Explain if a provision should be made for: (i) the decommissioning of the mine and (ii) the cost of restoring the site. b) Prepare the necessary journal entries for the years ended December 2015 & 2016 Show all workings. c) Prepare the journal entries for year ended December 31, 2045 Show all workings

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter5: Bond, Bond Valuation, And Interest Rates

Section: Chapter Questions

Problem 1nM

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