Question

On January 1st, 2019, ABC Inc. purchased a copper mine for $400,000. The company is required by provincial law to restore the land on which the mine is located to its initial condition at the end of the mine's ten year useful life. Restoration costs are estimated to be $35,000. ABC is subject to an interest rate of 5%. ABC Inc uses straight line deprecation and follows IFRS.

Required

Prepare the journal entries required on January 1st and December 31st, 2019 and the journal entry for December 31, 2020. Round all entries to the nearest dollar.

Answer 1

IFRS recquires the present value of future restoration to be recognised in the cost of land at initial recognistion.

Present value factor for 10th year = 0.6139

Present value of restoration cost = $35,000 x 0.6139 = $21,487

This amount should be added to the cost of Land, thus land will be initially recognised at = $400,000 + $21,487 = $421,487

Further initially a liability for restoration should also be recognised at present value which is $21,487

Depreciation should be charged on the initially recognised value of land, which is $421,487

Depreciation per year = $421,487 / 10 years = $42,149

Further at the end of each year, liability for restoration should be updated to make it equla to the present value then, this can be done by simply multiplying the account balance with interest rate of 5%.

Journal entry Dec 31,2019

Depreciation expense $42,149

Accumulated Depreciation - Land $42,149

(Charging depreciation)

Finance cost $1,074

Land restoration obligation $1,074

(This is calculated by multiplying 5% to account balance of $21,487)

New balance of Land restoration obligation = $21,487 + $1,074 = $22,561

Journal entry Dec 31,2020

Depreciation expense $42,149

Accumulated Depreciation - Land $42,149

(Charging depreciation)

Finance cost $1,128

Land restoration obligation $1,128

(This is calculated by multiplying 5% to account balance of $22,561)

New balance of Land restoration obligation = $21,561 + $1,128 = $23,689