ExpertMedium2 marksMultiple Choice
ACCA · Question 06 · Financial Reporting
Section A
Oceanic Wind PLC constructed an offshore wind turbine which commenced operations on 1 January 20X1. The company has a legal obligation to dismantle the turbine at the end of its 20-year useful life. The estimated cost of dismantling in 20 years is $5,000,000. The appropriate risk-adjusted discount rate is 6%. (The present value of $1 in 20 years at 6% is 0.3118).
What is the finance cost to be recognized in the statement of profit or loss for the year ended 31 December 20X2 (the second year of operation)?
Section A
Oceanic Wind PLC constructed an offshore wind turbine which commenced operations on 1 January 20X1. The company has a legal obligation to dismantle the turbine at the end of its 20-year useful life. The estimated cost of dismantling in 20 years is $5,000,000. The appropriate risk-adjusted discount rate is 6%. (The present value of $1 in 20 years at 6% is 0.3118).
What is the finance cost to be recognized in the statement of profit or loss for the year ended 31 December 20X2 (the second year of operation)?
Answer options:
A.
$93,540
B.
$99,152
C.
$300,000
D.
$1,559,000
How to approach this question
Calculate the initial present value of the provision. Unwind the discount for year 1 to find the provision balance at the start of year 2. Apply the discount rate to this new balance to find the year 2 finance cost.
Full Answer
B.$99,152✓ Correct
Initial provision (1 Jan 20X1) = $5,000,000 × 0.3118 = $1,559,000.
Finance cost for 20X1 = $1,559,000 × 6% = $93,540.
Provision balance at 31 Dec 20X1 = $1,559,000 + $93,540 = $1,652,540.
Finance cost for 20X2 = $1,652,540 × 6% = $99,152.
Common mistakes
Calculating the finance cost for the first year instead of the second year.
Practice the full ACCA FR — Financial Reporting Practice Exam 6
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