question archive In January 20X6, Sterling purchased land for storage of industrial waste and surplus manufacturing plant supplies, paying $1,500,000
In January 20X6, Sterling purchased land for storage of industrial waste and surplus manufacturing plant supplies, paying $1,500,000
Subject:FinancePrice:1.87 Bought7
In January 20X6, Sterling purchased land for storage of industrial waste and surplus manufacturing plant supplies, paying $1,500,000. The terms of the permit require Sterling to restore the property for any decontamination from oils, solvents, or other contaminants. Sterling hired an appraiser to provide an estimate of the decommissioning costs; the appraisal report projects decommissioning costs to be $850,000. The discount rate for the obligation is 4%. Sterling expects to use the land for 25 years. Management believes that use of the land for waste and surplus storage will not affect the value of the land once the storage site has been decommissioned and restored as required. The appraisal report supports this view. Sterling began using the land for its intended purpose in January 20X6. In reviewing the trial balance, you notice that the land purchase was recorded, but that the related decommissioning obligation has not been recorded.
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Answer:
Project Decommissioning Cost = $ 850000.
Discount rate = 4%
Period = 25 years
Hence, Present value of decommissioning liability = 850000 / (1.04)^25 = $ 318850 (approx)
As per Accounting Standards, present value of decommission liability must be capitalised with asset cost. the journal entry will be :
Land a/c.................dr $ 318850
to Provision for Decommissioning Liability $ 318850
( being provision for decommissioning liability made)
