Question 4 (6 marks)

Lupinetti Industries Ltd. has begun manufacturing a specialized cardiopulmonary bypass machine used to maintain the respiration and blood flow of patients during open-heart surgery.

The company expects to continue manufacturing this machine for another 10 years, until such time that competitive products render the current technology obsolete. The company has agreed to vacate its current factory in 10 years' time.

The local government granted the land for the facility on the condition that it will be returned to its original state when vacated. The company has also agreed to build a public park on the site once the remediation is complete. The company has estimated that the total cost of the site remediation to be $3 million and the cost of constructing the park to be $500,000.

The interest rate appropriate for this type liability is 11%.

Required:

a. Prepare the journal entry to initially record the decommissioning cost.

b. Prepare the journal entries required for the first year and second year after the initial recognition