On June 21, 2022 VISTA Inc. purchased a Xylene distillery for $260 m. Plant engineers estimated...

On June 21, 2022 VISTA Inc. purchased a Xylene distillery for $260 m. Plant engineers estimated a cost of $38 m to retire the plant at the end of its estimated useful life in December, 2039. The risk-free rate (rF) was 2.7% and VISTA’s CFO estimated a 380 bps credit spread to rF On Oct 10, 2032 VISTA sold the distillery to Retsof Energy Prospect Partners (REPP) for $36 m cash. In the journal entry to record this transaction, What was the Dr. to PPE to record the transaction? [3 points]

260.000

263.592

272.162

272.601

279.764

What was depreciation accrual for VISTA’s fiscal year ending Dec 31, 2022 ? [2 points]

What was the amount of the Dr. or Cr. to loss or gain for the 2032 transaction? [4 points]

Solutions

Expert Solution

Q. What was the Dr. to PPE to record the transaction? [3 points]

Ans: At the time of initial recognition in addition to purchase cost we will debit to PPE the PV of any obligation to retire the asset at the end of its future life. Here PV of $ 38m ( future obligation in Dec, 39) will be included in cost of Asset.

Rate = 2.7 + 3.8 = 6.5%

PV factor @6.5% for 17.53 years = (1/1.065)^17.53 = 0.3315

PV of 38m = 38*.3315 = 12.60 approx

So total amout to debit of PPE = 260+12.60 = 272.60m

Q. Depreciation accrual for year ending Dec, 31 2022?

Ans Life of asset = 17 years + (190/360) = 17.53 years

Depreciation for each year (SLM) = 272.60/17.53 = 15.55m

Depreciation for Dec, 31 2022 = 15.55*(190/360) = 8.24m

Q What was the amount of the Dr. or Cr. to loss or gain for the 2032 transaction? [4 points]

Ans:

Dep for 2022	8.24
Dep from 2023 to 2031	139.95	(9*15.55)
Dep for 2032	12.09	=15.55*(280/360)
Total accumulated depreciation	160.2844

Asset Cost	272.6
Less: Accumulated Dep	160.28
Net book value	112.32
Less sale pricce	36
Loss on sale	-76.32

ekkarill92 answered 1 year ago

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