Question
CARMA LIMITED Carma Ltd (Carma) acquired a plant for R1 000 000 on 1 January 2015. Depreciation is calculated using the straight-line method with an
CARMA LIMITED
Carma Ltd (Carma) acquired a plant for R1 000 000 on 1 January 2015. Depreciation is calculated using the straight-line method with an insignificant residual value.
Carma has a legal obligation to dismantle the plant at the end of the four-year useful life of the asset:
- The estimated future cost of dismantling amounts to R750 000 at the end of the four-year useful life.
- An appropriate discount rate of 10% is applicable.
- The present value of the provision on 1 January 2015 is therefore R512 260.
Carma measures plant in terms of the revaluation model in terms of IAS 16 Property, Plant and Equipment using the net replacement value method. Any resultant revaluation surplus is realised to retained earnings when the underlying asset is sold.
The plant was revalued for the first time on 31 December 2015 to its fair value of R1 200 000 (excluding the provision).
The fair value of the plant (excluding the provision) as at 31 December 2016 amounts to R800 000.
REQUIRED | |
(a) | Prepare the journal entries and the change in estimate note to be disclosed in the financial statements of Carma for the financial year ended 31 December 2015 and 31 December 2016 assuming that the future dismantling costs increased to R900 000 on 31 December 2016. Assume that the interest expense have already been accounted for in the financial records based on the old estimate during all financial years. Ignore taxation. |
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