Reference no: EM132671381

Question - Dakota Corporation, Inc., (DCI), whose reporting platform is IFRS and has a fiscal year-end of December 31, has retained your services to advise them on a future investment project. In late 2016, it procured a permit to strip mine 1,000 acres of pristine land in the western regions of Saskatchewan. The provincial government had issued the lease free of cost as a grant to stimulate employment in this region. The company had earlier submitted a legally binding comprehensive plan which included a timetable for the full reclamation of the land at the end of this lease. Although the permit is valid for ten years from the date of the commencement of operations, the management is expecting to complete its mining after seven years. Once it has closed the mine, DCI will restore the land and ground cover to its original topographical condition then provide reforestation, and finally encourage rehabilitation of pre-existing wildlife to the area. DCI will also engage in activities designed to minimize the air and water pollution created by the strip-mining process.

DCI has made the following estimates regarding the ultimate cost of the asset retirement obligation if the work was done currently:

1. All relevant labor cost estimates related to this reclamation work are currently $20 per hour. However, DCI is certain that this cost will increase by 10% by the end of the next seven years and then level off.

2. It will take approximately 10 hours per acre related to the restoration work on the soil, ground cover and tree planting. Similarly, the cost of equipment used for this work plus additional overhead costs is expected to be 75% of these labor costs.

3. Other grass seeding and tree planting costs (seeds and trees) estimate is $1,100 per acre.

4. The company has not previously made any attempts to restore pre-existing wildlife (several bird species, garter snakes) on its other property investments. Based on conservative estimates, these costs have been pegged at $500,000 for this project.

5. The company was legally obligated to complete every restoration work within six months of ending the mining operation.

6. The estimates of the restoration work (points 2 through 4 above) were made based on current prices. However, to accommodate possible future price increases to when the work will be performed, the company expects to pay an additional 15% of the restoration estimate described in points 2 through 4.

7. The initial investment to set up the plant and equipment in order to commence the mining work was estimated to be $21,000,000. The plant was scheduled to be set up and paid for in 2017 and the production was scheduled to commence on January 1, 2018. A discount rate of 4% per annum was considered to be realistic. Finally, the company will account for the ARO from the date of the commencement of the production process.

Required - Prepare appropriate entries (under IFRS unless specifically mentioned otherwise), to record the following:

1] The costs associated with the asset restoration obligation on January 1, 2018 and construction of the plant in 2017. Be sure to include a detailed breakdown of your computation of the restoration costs.

2] The annual depreciation expense to be recorded on December 31, 2018.

3] The finance costs on the outstanding liability for the years ended December 31, 2018 and 2019.

4] The restoration work was awarded to a contractor on January 15, 2025 at a firm price of $2,299,000 with the work completed on March 31, 2025. Full payment was made upon the completion of the work.