You have started on a new job with the designation of VP-Special Assignments and Issues. Before you could even get comfortable in your supersoft executive leather chair, in strides your boss, Ackque Feegerz carrying a sheaf of papers. “Ah, nothing looks better than a busy accountant on a Monday morning,” then looked at his watch and added, “you are already 15 minutes behind schedule. We do not pay for idle time and so from tomorrow, do come in at least an hour before office starts.” Then he deposited two files on your desk, and remarked, “Do please sort these out before 11:00 AM and begin with File I. Don’t bother me with petty questions. You are expected to take independent decisions, my man,” and he was gone. His note pinned on the folder informed you that it was essential for you to show sufficient details in your responses. And thus you start your day with this File I!

The company, Digi Communications, Inc., [DCI], began as a small startup firm in the late twentieth century but in five years, it grew rapidly and expanded competitively into several areas of this industry. It is currently operating internationally and its shares are listed on the NYSE. Its reporting platform is IFRS and has a fiscal year-end of December 31.

You now begin work on the file related to the obligations for asset retirement. In late 2016, it procured a permit to strip mine 1,000 acres of pristine land in the western regions of Saskatchewan. The provincial government had issued the lease free of cost as a grant to stimulate employment in this region. The company had earlier submitted a legally binding comprehensive plan which included a timetable for the full reclamation of the land at the end of this lease. Although the permit is valid for ten years from the date of the commencement of operations, the management is expecting to complete all its mining after seven years. Once it has closed the mine, DCI will restore the land and ground cover to its original topographical condition then provide reforestation, and finally encourage rehabilitation of pre-existing wildlife to the area. DCI will also engage in activities designed to minimize the air and water pollution
created by the strip mining process.

DCI has made the following estimates regarding the ultimate cost of the asset retirement obligation if the work was done currently:

L 1. All relevant labor cost estimates related to this reclamation work are currently $20 per hour. However, DCI is certain that this cost will increase by 10% by the end of the next seven years and then level off.

L 2. It will take approximately 10 hours per acre related to the restoration work on the soil, ground cover and tree planting. Similarly, the cost of equipment used for this work plus additional overhead costs is expected to be 75% of these labor costs.

L 3. Other grass seeding and tree planting costs (seeds and trees) estimate is $1,100 per acre.

L 4. The company has not previously made any attempts to restore pre-existing wildlife (several bird species, garter snakes) on its other property investments. Based on conservative estimates, these costs have been pegged at $500,000 for this project.

L 5. The company was legally obligated to complete all of the restoration work within six months of ending the mining operation.

L 6. The estimates of the restoration work (points 2 through 4 above) were made based on current prices. However to accommodate possible future price increases to when the work will be performed, the company expects to pay an additional 15% of the restoration estimate described in points 2 through 4.

L 7. The initial investment to set up the plant and equipment in order to commence the mining work was estimated to be $21,000,000 and was classified as Asset - Landmine. The plant was scheduled to be set up and paid for in 2017 and the production was scheduled to commence on January 1, 2018. A discount rate of 4% per annum was considered to be realistic. Finally, the company will account for the ARO from the date of the commencement of the production process.

Required:

Prepare all appropriate journal entries (under IFRS unless specifically mentioned otherwise), to record the transactions listed below. Be sure to show your computation work in detail.

a] The costs associated with the asset restoration obligation on January 1, 2018 and construction of the plant in 2017. Be sure to include a detailed breakdown of your computation of the restoration costs.

b] The annual depreciation expense to be recorded on December 31, 2018.

c] The finance costs on the outstanding liability for the years ended December 31, 2018 and 2019.

d] The finance costs on the outstanding liability for the year ended December 31, 2018 assuming that the company was using the ASPE accounting platform.

e] Now assume that it is time for DCI to shut down its mining operations and to dismantle the erected equipment at the end of its 7-year life. On January 1, 2025, DCI issued 3,000 5-year 6% bonds, par value $1,000 to Environmental Engineers, Inc., a restoration company as compensation to undertake and complete the required restoration work. Prepare the required journal entry, in proper format, to record this transaction given the market interest rate on the date of the issue of the bonds was 7%.

Assume for Sections [f] and [g] below, that the company estimates that an additional future restoration cost of $148,000 occurs as a result of production activities during 2019. This additional cost is associated with the use of the equipment installed at the tracking station and is to be accrued and recorded at the end of 2019.

f] Record this transaction only under
-IFRS requirements.
-ASPE requirements.

g] Determine the annual depreciation expense amount (No Journal Entry Required) to be reported on
December 31, 2020 under
-IFRS requirements.
-ASPE requirements.

Answer rating: 100% (QA)

Annual depreciation under IFRS is calculated on lower of useful life 8 years or lea... View the full answer