Reference no: EM132859001
Question - On January 1, 2020, Timber Co. opened a small open pit mining operation that supplies gravel for highway construction. The original infrastructure for the mine cost $600,000. This was capitalized as a single asset called "aggregate mine equipment" which was assumed to be depreciable with a seven-year life. At the end of the site's useful existence, Timber is required to return the site to a "natural" state as defined by provincial regulation. This would include the dismantling and removal of infrastructure equipment. At the beginning of operations (January 1, 2020) it was estimated that the restoration would cost $500,000. Since material is removed each year from the site, each year's production will add an estimated $35,000 to the expected costs of the restoration. That is, the final expected cost of the restoration will be $500,000 + (7 X $35,000) = $745,000. An appropriate discount rate is 8%. Timber Co. prepares its statements in accordance with ASPE.
Instructions -
a. Prepare the journal entries to record the opening of the mine and the asset retirement obligation. Round amount to the nearest dollar.
b. Record any journal entries at December 31, 2020 for the mine and the asset retirement obligation.
c. Record any journal entries at December 31, 2021 for the mine and the asset retirement obligation.
d. Would your journal entries in parts b and c be any different if Timber Co. followed IFRS?
e. All of the entries were made through to December 31, 2026. The mine was closed and the sire restored in early 2027 as expected at a cost of $752,000. Prepare the entry to record the settlement of the asset retirement obligation.
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