Reference no: EM132949771
KaC company acquired a permit to instal wind turbines for generating electricity on the land sometime early in 2016. Its reporting platform is IFRS and has a fiscal year-end of December 31.
It has made the following estimates regarding the ultimate cost of the asset retirement obligation of the work completed currently:
L 1. The restoration work on the soil is expected to take approximately 12 hours per acre requiring ground cover and tree planting. The cost of equipment to be used for this work plus additional overhead costs is expected to be 75% of these labor costs. All relevant labor cost estimates related to this reclamation work are currently set at $18 per hour. However, KaC is certain that this cost will have increased by an additional 10% by the end of the next seven years.
L 2. Installing paved pathways and metallic benches throughout the area which was estimated to cost $83,400.
L 3. Grass seeding and tree planting is estimated to cost $900 per acre.
L 4. The company has not previously made any attempts to restore pre-existing wildlife (several bird species, garter snakes) on its other investment properties. Based on conservative estimates, these costs have been pegged at $500,000 for this project.
L 5. The company was legally obligated to complete all of the restoration work within six months of ending the mining operation.
L 6. The estimates of the restoration work (points 3 and 4 above) were made based on current prices. However to accommodate possible future price increases when the work will be performed, the company expects to pay an additional 15% of the restoration estimate described in points 3 and 4.
L 7. The initial investment required to construct the turbine equipment in order to commence the generation of electricity was estimated to be $42,000,000 and was classified as Asset - Turbines. The operation was located on a 2,000 acre plot of land, leased from the government and was scheduled to be set up and paid for in 2017. The project was scheduled to commence operations on January 1, 2018. A discount rate of 6% per annum was considered to be realistic. Finally, the company will account for the ARO from the date of the commencement of the project.
Problem 1: Record the journal entries for the finance costs on the outstanding liability for the years ended December 31, 2018 and 2019.
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