Answered step by step
Verified Expert Solution
Question
1 Approved Answer
QUESTION TWO [52] You are a trainee in financial reporting division at Bolder Limited ('Bolder'). The financial year end is 31 December 2021. Bolder is
QUESTION TWO [52] You are a trainee in financial reporting division at Bolder Limited ('Bolder'). The financial year end is 31 December 2021. Bolder is one of the world's most advanced and efficient producers of high quality steel. Steel is a widely used metal with demand driven by end use consumption in transportation, packaging, construction and household items. As a part of your trainee duties, the following two matters have been referred to you by your senior accountant, Mr. Siya Bonga: Earthquake Bolder conducts some mining activities in Orkney. During December 2021, Orkney was hit by an earthquake measuring 6.5 in magnitude. One of Bolder's tankers transporting toxic waste from the manufacturing plant overturned as a result of the earthquake and spilt the waste into a community farm. The waste entered a river on the farm which is the only water supply to a nearby village. The river also feeds into the irrigation system of the farm. Bolder's tanker that overturned also destroyed the greenhouse structure on the farm. There was a public outcry from the villagers, the farmer and the environmentalists over the damage caused to the farm and the river by Bolder's tanker. Siya Bonga, the senior accountant, does not believe that Bolder has to make any adjustments to the annual financial statements with regard to the earthquake incident. When discussing the matter with you, Siya Bonga explained that "It was no fault of the driver of the tanker. The accident was a result of a freak earthquake that has never occurred before, therefore I believe Bolder has no obligation to compensate the farmer or the villagers nearby." Due to the negative publicity, the directors of Bolder made an announcement in the local newspaper on 30 December 2021 that the company would rehabilitate the farm and the river and compensate the farmer and villagers by 25 February 2022. A detailed investigation would be conducted during early February 2022 to determine the extent of the damage. At year end the directors wish to create a provision for the rehabilitation costs however they are unable to estimate the cost as this is the first time that an incident of this nature has occurred. The financial statements will be published on 31 January 2022. Plant Bolder Limited purchased a plant, with a useful life of 5 years at a cost of R6000000 on 1 January 2018. The plant is used in the manufacturing process. Current legislation requires all companies operating plants of this nature to decommission the plant at end of the asset's useful life. Engineers estimate the future cost of decommissioning to be R3 000000 . Bolder uses the revaluation model to measure the plant and accounts for the revaluation on the net replacement value basis. At 31 December 2020, the plant was revalued upwards by R 1200 000 . The company does not transfer the realised portion of any revaluation surplus to retained earnings over the life of the plant. There was no indication of impairment at any stage during the asset's useful life. On 1 January 2021, the engineers employed at Bolder conducted research and based on estimations received from experts involved in dismantling of such plants, the expected cost of decommissioning the plant was increased to R4 500000 . Bolder uses the re-allocation method to record changes in accounting estimates. An appropriate pre-tax discount rate is considered to be 10%. a) Draft an e-mail to Mr Siya Bonga to discuss how Bolder Limited should recognise and disclose the accident arising as a result of the earthquake in the financial statements for the year ended 31 December 2021 in accordance with the Conceptual framework and IAS 37 Provisions, Contingent liabilities and contingent assets. b) Prepare the necessary journal entries to account for the plant and the decommissioning thereof for the years ended 31 December 2020 and 31 December 2021. Taxation entries are not required. All workings must be shown and referenced. c) Disclose the following notes in accordance with International Financial Reporting Standards for the year ended 31 December 2021 : - Provision for decommissioning costs
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started