Question
Tormarten Environmental Inc. (TEI) has just completed construction of a special hazardous waste disposal site outside Toronto. The site will accept waste such as cooked
Tormarten Environmental Inc. (TEI) has just completed construction of a special hazardous waste disposal site outside Toronto. The site will accept waste such as cooked muck & sludge from dry cleaning facilities, as well as used oil from automotive facilities, and is expected to be operational for 20 years.The land was purchased for $850,000, and construction costs (including the installation of concrete lining and multiple ground water sampling wells) amounted to $3.5 million. On September 1, 2022, the municipality inspected the newly completed construction site, and issued a hazardous waste permit that allows TEI to operate the facility until August 31, 2042. The permit stipulates that TEI must properly cap the site and restore the surface immediately following the operating period so that it will be available and safe for alternate uses.TEIs engineers have agreed on the following estimates of the cost of complying with the permit stipulations (site restoration costs), under the assumption that the costs will be incurred in 2022: Materials (including clean fill and capping material): $235,000 Labour: $145,000 Other (equipment usage, hiring of specialized contractors, project management, water and soil testing): $630,000 Inflation can be assumed at 3%/year. TEIs discount rate is 8%. TEI is a private company that follows ASPE and has a December 31 year end. Required:
Task 1 (2022) You work at TEI and have been assigned to the new facility. Your first task is to prepare a report for the CFO providing him with some proforma information for the upcoming few years. (a) Determine the cost (in 2042 dollars) TEI expects to incur in remediating the facility immediately after it closes in August 2042. (b) Prepare the journal entry to record the obligation TEI faces as stipulated in the operating permit.
(c) Prepare the 2022 and 2023 year-end journal entries related to the hazardous waste disposal site.TEIs depreciation policies require straight line amortization over the useful life of its assets. The site is expected to have no residual or salvage value. (d) Prepare a partial proforma balance sheet in good form for fiscal 2023, showing captions and related amounts for the site and the related obligation. (e) Draft a note that could be included in TEIs December 31, 2022 financial statements. Ensure you show all required disclosures.
Task 2 (2027) It is now 2027, and over the past several years, you have performed well. You have been promoted to the site controller role and have become the companys internal expert on asset retirement obligations/ decommissioning provisions. (a) TEL has performed well over the intervening years too. In fact, the board of directors is considering a possible IPO within the next four years. Of course, if TEI were to do an IPO, the company would have to switch to IFRS. Accordingly, the CFO has asked you to investigate the impact of such a switch on the accounting for the site restoration obligation, as hes aware that there are differences from ASPE. For this preliminary analysis, he would just like you to discuss the differences, and how they might affect TEIs financial statements. He would also like you to comment on the advantages and disadvantages of the IFRS approach vs. the ASPE approach. Include in your discussion any assumptions you made.
(b) Note that TEI continues to report under ASPE throughout 2027. The IPO and switch to IFRS have NOT been approved by the board. In March 2027, new, more stringent remediation regulations were announced by the municipality. These regulations applied to TEIs permit and became effective on September 1, 2027. TEIs engineers again worked out an estimate of the cost to restore the site, under the assumption that the costs were incurred at that time i.e., in 2027. Materials (including clean fill and capping material): $327,000 Labour: $135,000 Other (equipment usage, hiring of specialized contractors, project management, water and soil testing): $840,000 Determine the revised cost TEI now expects to incur in remediating the facility immediately after it closes in August 2042. The inflation rate estimate is now 4%/yr.
(c) Prepare the journal entry to adjust the carrying value of the ARO for TEI, as at September 1, 2027. (d) Prepare the 2027 year-end journal entries related to the hazardous waste disposal site. (e) In December 2027, one of TEIs waste management trucks overturned during a snowstorm as it turned into the hazardous waste site. Unfortunately, the truck was fully loaded with cooked muck and sludge, and thousands of litres of this material leaked into the ditch, contaminating a twenty acre field adjacent to the waste site. TEI has been ordered to decontaminate the field and an environmental fine is pending. The engineers estimate it will cost $45,000 to clean the field. Management is negotiating with the adjacent landowner and expects to pay $30,000 cash in addition to the cleanup costs, to compensate him for the accident, and to avoid a lawsuit. The environmental fine could range anywhere from $5,000 to $50,000 according to the regulations. How would you advise TEI to account for the costs related to the accident?
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