Estimated Cost Assignment | Homework For You
March 18th, 2020
Extract Co prepares its financial statements to 31 December each year. During the years ended 31 December 20X0 and 31 December 20X1, the following event occurred. Extract is involved in extracting minerals in a number of different countries. The process typically involves some contamination of the site from which the minerals are extracted. Extract makes good this contamination only where legally required to do so by legislation passed in the relevant country. The company has been extracting minerals in Copperland since January 2014 and expects its site to produce output until 31 December 2021. On 23 December 2016, it came to the attention of the directors of Extract that the government of Copperland was virtually certain to pass legislation requiring the making good of mineral extraction sites. The legislation was duly passed on 15 March 2017. The directors of Extract estimate that the cost of making good the site in Copperland will be $2 million. This estimate is of the actual cash expenditure that will be incurred on 31 December 2021.
(a) Explain why there was a need for an accounting standard dealing with provisions, and summarise the criteria that need to be satisfied before a provision is recognized.
(b) Compute the effect of the estimated cost of making good the site on the financial statements of Extract for BOTH of the years ended 31 December 2016 and 2017. Give full explanations of the figures you compute. The annual discount rate to be used in any relevant calculations is 10% The relevant discount factors at 10% are: Year 4 at 10% 0.683 Year 5 at 10% 0 621. Get Finance homework help today