Question 4 Sea Limited, a public company, purchased a coal mine and its related plant on 1 January 2014. During the year to 31 December 2014, a new Environmental Legislation had been passed and enforced with immediate effect. This Legislation requires Sea Limited to landscape the area affected by the mining activities during the estimated life of the coal mine. At 31 December 2014, the estimated economic life of the coal mine is ten years. At the same time, the future costs of the landscape, which have been estimated by a professional surveyor with sufficient experience to be $162,000, have to be discounted at 8% to the present value as of 1 January 2014. Required: Discuss and explain the appropriate accounting treatments for the year ended 31 December 2014 of the event given in the question. In your answers, you have to address the following areas: (i) (ii) (iii) (iv) Whether provision should be made for landscaping Best estimate for the amount of provision for landscaping Costs of property, plant and equipment Accounting entries to record this transaction (HKIAAT Paper 7 Advanced Accounting June 2008) Question 5 Question 4 A provision for the future costs for landscaping should be made by Sea Limited because the following conditions have been met by 31 December 2014: (i) Sea Limited has a present legal obligation to have the landscaping as a result of a past event of acquiring the coal mine and its related plant; (ii) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation because Environmental Legislation has been enforced; and (iii) the amount of obligation is estimated by an expert and therefore, is reliable. The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. In accordance with HKAS 37, the following issues should be considered in determining the "best estimate": (i) the risks and uncertainties that inevitably surround the events and circumstances; for example, effects of the mining activities on the land; (ii) the amount of provision shall be discounted to the present value where the effect of time value of money is material; and (iii) future events, for example, the changes in technology to landscape the land, that may affect the amount required to settle an obligation should be reflected in the provision. In this case, the amount of $150,000 (already discounted to the present value), together with the unwinding of the discount of $12,000 should be the best estimate of the amount of provision of $162,000. In accordance with HKAS 16, cost of an item of property, plant and equipment includes: its purchase price and any costs directly attributable to make it capable of operating in the manner intended by management; as well as the initial estimate of the costs of dismantling and removing the item and restoring the site as an obligation to the entity. 5

Question 4 Sea Limited, a public company, purchased a coal mine and its related plant on 1 January 2014. During the year to 31 December 2014, a new Environmental Legislation had been passed and enforced with immediate effect. This Legislation requires Sea Limited to landscape the area affected by the mining activities during the estimated life of the coal mine. At 31 December 2014, the estimated economic life of the coal mine is ten years. At the same time, the future costs of the landscape, which have been estimated by a professional surveyor with sufficient experience to be $162,000, have to be discounted at 8% to the present value as of 1 January 2014. Required: Discuss and explain the appropriate accounting treatments for the year ended 31 December 2014 of the event given in the question. In your answers, you have to address the following areas: (i) (ii) (iii) (iv) Whether provision should be made for landscaping Best estimate for the amount of provision for landscaping Costs of property, plant and equipment Accounting entries to record this transaction (HKIAAT Paper 7 Advanced Accounting June 2008) Question 5 Question 4 A provision for the future costs for landscaping should be made by Sea Limited because the following conditions have been met by 31 December 2014: (i) Sea Limited has a present legal obligation to have the landscaping as a result of a past event of acquiring the coal mine and its related plant; (ii) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation because Environmental Legislation has been enforced; and (iii) the amount of obligation is estimated by an expert and therefore, is reliable. The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. In accordance with HKAS 37, the following issues should be considered in determining the "best estimate": (i) the risks and uncertainties that inevitably surround the events and circumstances; for example, effects of the mining activities on the land; (ii) the amount of provision shall be discounted to the present value where the effect of time value of money is material; and (iii) future events, for example, the changes in technology to landscape the land, that may affect the amount required to settle an obligation should be reflected in the provision. In this case, the amount of $150,000 (already discounted to the present value), together with the unwinding of the discount of $12,000 should be the best estimate of the amount of provision of $162,000. In accordance with HKAS 16, cost of an item of property, plant and equipment includes: its purchase price and any costs directly attributable to make it capable of operating in the manner intended by management; as well as the initial estimate of the costs of dismantling and removing the item and restoring the site as an obligation to the entity. 5

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter8: Operating Assets: Property, Plant, And Equipment, And Intangibles

Section: Chapter Questions

Problem 8.8MCP

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