Reference no: EM132920275

During the reporting period ending 30 June 2018, Nichol Ltd erected an oil rig in Noosa River. The cost of the rig and associated technology amounted to $99 500 000. The oil rig commenced production on 1 July 2018. At the end of the rig's useful life, which is expected to be five years, Nichol Ltd is required by its resource consent to dismantle the oil rig, remove it, and return the site to its original condition. After consulting its own engineers and environmentalists, Nichol Ltd estimates that if such work was required to be done at the present time it would cost $15 000 000. Anticipating that inflation will average 3 per cent over the next five years, the adjusted cost is expected to be $15 000 000 × (1.03)5, which equals $17 389 110. If we accept that the rate on five-year government bonds reflects the relevant time value of money, and if the rate is 4 per cent, then the present value of the restoration provision would be $17 389 105 ÷ (1.04)5, which equals $14 292 577.

REQUIRED

Problem 1: 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 2018, 30 June 2019 and 30 June 2020. Ignore depreciation.