ExpertACCA · Question 06 · Accounting for Transactions
SECTION A
Metro Water Authority, a public utility, constructs a new water treatment facility. Local legislation requires the facility to be dismantled and the site restored at the end of its 30-year useful life. The estimated cost of dismantling in 30 years is $5,000,000. The appropriate discount rate is 8%. The present value of $1 in 30 years at 8% is 0.0994.
How should this dismantling obligation be accounted for upon completion of the facility?
SECTION A
Metro Water Authority, a public utility, constructs a new water treatment facility. Local legislation requires the facility to be dismantled and the site restored at the end of its 30-year useful life. The estimated cost of dismantling in 30 years is $5,000,000. The appropriate discount rate is 8%. The present value of $1 in 30 years at 8% is 0.0994.
How should this dismantling obligation be accounted for upon completion of the facility?
Answer options:
Recognize a provision of $5,000,000 and expense it immediately.
Recognize a provision of $497,000 and expense it immediately.
Recognize a provision of $497,000 and add $497,000 to the cost of the facility.
Disclose a contingent liability of $5,000,000 in the notes to the financial statements.
How to approach this question
Full Answer
Common mistakes
Practice the full ACCA FR — Financial Reporting Practice Exam 3
32 questions · hints · full answers · grading