Question 1 During the year to 31 December 2013, Acacia Mining Ltd built a new mining...

Question 1

During the year to 31 December 2013, Acacia Mining Ltd built a new mining facility to take advantage of new laws regarding on-shore gas extraction. The construction of the facility cost K10 million, and to fund this, Acacia Mining Ltd took out a K10 million 6% loan on 1 January 2013, which will not be repaid until 2016. The 6% interest was paid on 31 December 2013. Construction work begun on 1st January 2013, and the work was completed on 30 November 2013. As not all funds were required immediately, Acacia Mining Ltd invested K3 million of the loan in 4% bonds from 1 January 2013 until 30 April 2013. Mining commenced on 1 December 2013 and is expected to continue for 10 years. As a condition of being allowed to construct the facility, Acacia Mining Ltd is required by law to dismantle it on 1 January 2024. Acacia Mining Ltd estimated that this would cost a further K3 million. As the equipment is extremely specialized, Acacia Mining Ltd invested significant resources in recruiting and training employees. Acacia Mining Ltd spent K600,000 on thus process in the year to 31 December 2013, believing it to be worthwhile as it anticipates that most employees will remain on the project for the entire 10 year duration. Acacia Mining Ltd has a cost of capital of 6%.

Required: Show, using extracts, the correct financial reporting treatment for the above items in financial statements for Acacia Mining Ltd for the year ended 31 December 2013.

Expert Solution

Acacia Mining Limited
Loan taken in totla	10000000	@ 6% as on 01.01.2013
invested in Other Instruments	3000000	@ 4% as on 01.01.2013 to 30.04.2013


Construction Period	01.01.2013 - 30.11.2013
Interest paid on 31.12.2013

Interest Cost	10000000X 6% X11/12	550000	Capitalised
Interest Cost	10000000X 6% X1/12	50000	Charged to Income Statement
Interest Earned	3000000 X 4% X 4/12	40000	Net off From Intterest
Mining Emplyee Cost	600000	Charged to Income Statement
Dismantling Cost		3000000	Payable on 2024

Calculation on Dismantling Cost to be paid off and Charged during the year
PV factor is 6% for 11 years
0.5268	3000000	1580363
Hence , Provision is required for the above and Interest shall be payable to that extent which will become 3000000 at the end of 11th Year.


Extracts of Income Statement

*Finance Cost*
Interest Cost - Interest Earned	50000-40000	10000
*Employee Cost*
Minning Employee Cost		600000

Extracts of Financial Statements
Non Current Assets
Minning Cost ( Capitalised Interest )		550000
Dismatling PV Cost			1580363

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