PROBLEM 2: ASSET RETIREMENT OBLIGATION (20 marks)

The accountants of Tdex group, an international firm, provide you with the following notes and require you to answer the questions related to ARO:

1. Leased land from Alberta government for a maximum period of 20 years. Installation of two oil wells at a total cost of $2,500,000 and capitalized to Extraction Assets. These are amortized over their expected productive life- 20 years on a straight-line basis.

2. Operations start on January 1, 2020.

3. Accountant recorded $498,312 as Asset Retirement Obligation on January 1, 2020.

4. Annual interest costs will be $14,949 at end 2020.

Mr. Dupond then states I think the retirement costs are too high but this information came from the audit partner at our CPA firm so we will rely on it. Imagine we even have to pay interest on it during this economic downturn when we have to cut the budget!!

Instruction-

1. Calculate the discount rate (round up; for instance if you find 5.99% then consider 6%)?

2. Provide the journal entries required to record the following transactions (in accordance with IFRS):

a] The asset retirement obligation recorded on January 1, 2020.

b] The depreciation expense incurred for the Extraction Assets for 2020.

c] The annual interest accruing on the Asset Retirement Obligation for 2021.

3. Assume that at end useful life (on December 31, 2049), the company were to incur an actual cost of $850,000 to safely retire the Extraction assets. Provide the journal entry required to record this transaction

4. Now, assume $500,000 increase in dismantling costs due to oil production occurred at the end of the first year. Prepare the journal entry required under IFRS.

5. Assume Tdex groupfollow ASPE. How to record the increase of the ARO at the end of the first year. Calculate depreciation expense for the second year and prepare journal entry to record asset depreciation.