Question
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
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 several files on your desk, 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 started 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.
You now begin with the file related to the obligations for asset retirement. On January 1, 2016, DCI, with great fanfare and publicity, opened an inter galactic satellite tracking station equipped with the latest electronic equipment located somewhere in the Rocky mountains of Alberta. The company had obtained a provincially issued permit to install 3 large tracking antennae and two telescopes to provide users with upto date telecommunication and weather data. The permit was issued to operate the equipment initially for ten years, beginning January 1, 2016. The company was required to assume the legal and financial obligations under the provincial removal and restoration laws, to dismantle and remove all constructed structures and to restore the site to its original state at the end of the contract.
You had noticed the remark in the note pinned on the ARO file by Mr. Feegerz, "Oh, I didn't realize we had to pay for closing down this circus in Alberta. Wasting good money on star gazing. Look into this issue please." Under this plan, the company capitalized the cost in its books asSpace Tracking Equipment. They also recorded the present value of the estimated future obligation to restore the sites. The cost would be amortized on a straight line basis over a ten-year life.
You reviewed some of the operating figures related to previous years. DCI had reported on its balance sheet, dated December 31, 2018,$871,851as the balance of the Asset Retirement Obligation. The company had also recorded a depreciation expense of $1,031,169 for the Space Tracking Equipment for the year 2018. The company's estimated its cost of capital to be 7%.
Required:
Present the appropriate journal entries (under IFRSunless specifically mentioned otherwise), to record
the transactions listed below. Be sure to show your computation work in detail.
- a]The amount of the obligation associated with the cost of the site restoration which was recorded on January 1, 2016 upon the construction of the satellite tracking station.
- b]For Section [b] only, assume the company is applying ASPE.The finance costs on the outstanding liability for the year endedDecember 31, 2018.
- c]Determine the cost which DCI incurred to install the 3 large tracking antennae and two telescopes which were classified asSpace Tracking Equipment.
d] Now assume that it is time to dismantle theSpace Tracking Equipmentat the end of its 10-year life. DCI issued 2,000 5-year 6% bonds, par value $1,000 to Environmental Engineers, Inc., a restoration company to undertake and complete the required restoration work. Prepare the required journal entry, in proper format, to record this transaction.
Assume for Sections [e] and [f] below, that the company estimates that an additional future restoration cost of $48,000 occurs as a result of activities during 2018. This additional cost is associated with the use of the equipment installed at the tracking station and is to be recorded at the end of 2018.
- e]Record this transaction underpIFRS requirements.
- pASPE requirements.
- f]Determine the annual depreciation expense amount (No Journal Entry Required) to be reported onDecember 31, 2019following the transaction in [c] above under
- pIFRS requirements.
- pASPE requirements.
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