Calculate the present value obligation and the finance cost

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Reference no: EM132767613

Question - Prestige Ltd is a manufacturing company with a 31 December year end. The company purchased a manufacturing plant at a cost of R14 000 000. The Company's manufacturing plant releases toxic substances that will contaminate the land surrounding the plant unless they are collected and stored safely. The local authorities approved the erection of the plant, provided the entity undertakes to build safe storage tanks for the toxic substances and to remove this after a period of 20 years and restore the environment to its original condition. On 1 January 2018 (the day on which the plant was commissioned), it was determined that it would cost R4 000 000 at future prices to remove the tank and restore the environment after 20 years have expired. The appropriate discount rate is 12%.

Required -

1. Explain when a contingent liability will be recognised in the financial statements.

2. Calculate the present value obligation and the finance cost for the year ended 31 December 2018 AND include the journal entries for the year ended 31 December 2018.

3. Prepare an extract of Statement of Financial Position for the year ended 31 December 2018.

Reference no: EM132767613

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