Question

Libom Ltd. purchase a drill for raw materials on 1/7/14. Cost of drill is $3,455,000. Installation costs are the following:

Site access costs $1,548,000

Transportation of drill      330,500

Set-up      190,000

Licence/consent                   854,900

Engineer’s fees                   250,000

Total              $3,173,400

Dismantling costs $   110,500 (in 6 years time)

Site clean-up                1,749,000

Transport costs                   285,000

Replacement-Flora                   427,700

Total              $2,572,200

Costs to be over life of the mine. Discount rate is 9%.

Answer 1

Total costs is $2,572,200 for clean-up in 6 years so PV will be:

$2572200 * PVIF(9%, 6 years)

$2572200 * 0.596267326 = $1533719

Date	Account Titles	Debit	Credit
1/07/2017	Drill ($3455000 + $3173400 + $1533719)	$8162119
	Cash/Payables		$6628400
	Provision for Restoration		$1533719
	(To record acquisition of drill and provision for restoration)

Date	Opening Balance	Interest (9%)	Balance
1/7/14			1,533,719
30/6/15	1,533,719	138,035	1,671,754
30/6/16	1,671,754	150,458	1,822,212
30/6/17	1,822,212	163,999	1,986,211
30/6/18	1,986,211	178,759	2,164,970
30/6/19	2,164,970	194,847	2,359,817
30/6/20	2,359,817	212,383	2,572,200

Date	Account Titles	Debit	Credit
30/6/15	Interest expense	138,035
	Provision for restoration		138,035
	(To record the interest expense on restoration of drill site)
30/6/16	Interest expense	150,458
	Provision for restoration		150,458
	(To record the interest expense on restoration of drill site)