Reference no: EM132676906
Problem - Silver Linings Ltd. commenced a mining operation in early 20X5. The company is required by the terms of provincial legislation to remediate the mine site when mining is completed, likely in five years' time. Silver Linings Ltd. estimates that this will cost $2,650,000. A reasonable market interest rate is 8%.
Required -
a. Calculate the present value of the decommissioning obligation.
b. Prepare a table that shows the balance of the provision and interest expense over the life of the liability.
c. Assume that at the end of 20X6, the company re-estimates that the cost of remediation at $3,300,000. Other assumptions are unchanged. Calculate the interest expense for 20X6, the new present value, and the adjustment to the obligation for the change in estimates.
d. Prepare a table that shows the balance of the revised provision and interest expense over the life of the liability.
e. Assume that at the end of 20X8, the company re-estimates the cost of remediation at $2,800,000, and the market interest rate is now 7%. Calculate the interest expense for 20X8, the new present value, and the adjustment to the obligation for the change in estimates.
f. Calculate the balance of the decommissioning obligation at each 31 December, from 20X5 to 20X8.
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