Huaraz Incorporated (Huaraz) built a small power plant on land it owns at a cost of $20 million. The power from the plant will be used to run the factory that produces Huaraz’s inventory. The power is part of the cost of the inventory. Constructions were completed on January 1, 2020, and the power plant went into operation immediately. The plant will be operating for the next 20 years. At the end of the 20 years, Huaraz will be required by law to incur an estimated cost of $8 million in restoration costs. In addition, management estimates that an additional $300,000 of restoration costs per year will be added for each year that the plant is operating. The interest rate that reflects the risks to Huaraz is 8% and the $8 million takes into consideration inflation.

Required: 

a) Provide the journal entry for the restoration costs on January 1, 2020. Assume no entries have been made before 2020.

b) Prepare all adjusting entries required with respect to the power plant on December 31, 2020. Assume that Huaraz follows IFRS.

c)Prepare the adjusting entries that would be required with respect to the plant on December 31, 2020, if Huaraz followed ASPE. You only have to provide the entries that would be different from IFRS.

d) Suppose that in 2040 the power plant’s life comes to an end and Huaraz incurs the restoration costs as required. It turns out that the cost of the work is $9.3 million. What entry would be required at the time with respect to the work?

e) Why do you think companies aren’t required to accrue all estimated decommissioning/restoration costs at the beginning of the asset’s life (including the ones that are incurred by operating the assets)?

Answer rating: 100% (QA)

a Resotarion cost account 8300000 Provision for reinstatement 8300000 b Plant Account 20000000 Capit... View the full answer