Question

Bob the Builder acquires a right to operate a gold mine for 5 years in Northern Ontario on April 1, Year 6 by paying $400,000 and issuing a $640,000 four-year, non-interest-bearing note. According to the terms of the note, Bob has to pay four $160,000 installments at the anniversary of the note, starting April 1, Year 7

At the end of 5th year, Bob is legally required to restore the site and Bob expects to pay $100,000. Since Bob built Bob the Builder-themed playground at the gas station site, the town in Northern Ontario is very excited to have a similar playground in their town. Although not required, Bob knows people expect to have the playground. To Bob’s best estimate, Bob expects to spend$25,000, once the site is restored (To make our lives easier, let’s assume that $25,000 will be spent at the end of 5th year). Out of $100,000 above, the 40 percent is attributable to the acquisition and the rest is attributable to the production of mine.

Bob uses straight-line depreciation method and does not adopt any convention for partial-year depreciation. Bob’s fiscal year ends on December 31. Please assume that Bob uses 5% effective interest rate for the above transaction.

(1) Assuming that [1] Bob prepares his financial statements based on IFRS and [2] Bob does not have any other liabilities other than the those from the above transaction, what would be the total interest expense for Year 6? [7 marks]

(2) Assuming that [1] Bob prepares his financial statements based on ASPE and [2] Bob does not have any other liabilities other than the those from the above transaction, what would be the total interest expense for Year 6? [7 marks]