Reference no: EM133530819
Case Study: Zebra Ltd erected an oil rig in Camel River. The cost of the rig and associated technology amounted to $ 8,000,000 during the reporting period ending 30 June 2019.
The oil rig commenced production on 1 July 2019. At the end of the rig's useful life, which is expected to be 3 years, Nichol Ltd agreed to dismantle the oil rig, remove it, and return the site to its original condition due to moral obligation. After consulting its own engineers and environmentalists, Zebra Ltd estimates that if such work was required to be done at the present time it would cost $1,000,000.
The cost of this are expected to increase by an average of three percent per year over the next three years.
The rate on 3-year government bonds reflects the relevant time value of money, and the rate is 4 percent.
The accountant of the company has ALREADY calculated the following for you based on the above information:
1) Adjusted future cost: $1 092 727
2) The present value of the restoration costs: $97 1430
Required:
Prepare the journal entries necessary to account for the establishment of the rig and the changing balance of the restoration provision for the years ended 30 June 2019.