ExpertMedium2 marksMultiple Choice
ACCA · Question 06 · Provisions and Contingencies
SECTION A
EcoMine Co operates a copper mine. Under local legislation, EcoMine is required to restore the site at the end of its 10-year useful life. The present value of the estimated restoration costs at the commencement of mining operations on 1 January 20X1 was $5,000,000. The discount rate is 8%.
What is the total charge to the statement of profit or loss for the year ended 31 December 20X2 in respect of this environmental provision?
SECTION A
EcoMine Co operates a copper mine. Under local legislation, EcoMine is required to restore the site at the end of its 10-year useful life. The present value of the estimated restoration costs at the commencement of mining operations on 1 January 20X1 was $5,000,000. The discount rate is 8%.
What is the total charge to the statement of profit or loss for the year ended 31 December 20X2 in respect of this environmental provision?
Answer options:
A.
$400,000
B.
$500,000
C.
$900,000
D.
$932,000
How to approach this question
Identify the two P&L components: 1. Depreciation of the capitalized restoration asset. 2. Unwinding of the discount (finance cost) on the provision. Remember to calculate the provision balance at the start of Year 2 to find the Year 2 finance cost.
Full Answer
D.$932,000✓ Correct
The initial $5m is added to PPE and depreciated over 10 years ($500k/year). The provision unwinds at 8%. Year 1 finance cost = $5m * 8% = $400k. Provision at start of Year 2 = $5.4m. Year 2 finance cost = $5.4m * 8% = $432k. Total Year 2 P&L charge = $500k (depreciation) + $432k (finance cost) = $932k.
Common mistakes
Calculating the Year 1 finance cost instead of Year 2, or forgetting to include the depreciation of the capitalized asset.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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