On 1 October 20X3 Xplorer Co commenced drilling for oil from an undersea oilfield. The extraction of oil causes damage to the seabed which has a restorative cost (ignore discounting) of $10,000 per million barrels of oil extracted. Xplorer Co extracted 250 million barrels in the year ended 30 September 20X4.

Xplorer Co is also required to dismantle the drilling equipment at the end of its five-year licence. This has an estimated cost of $30 million on 30 September 20X8. Xplorer Co's cost of capital is 8% per annum and $1 has a present value of 68 cents in five years' time.

What is the total provision (extraction plus dismantling) which Xplorer Co would report in its statement of financial position as at 30 September 20X4 in respect of its oil operations?

Which of the following statements are true in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

1. Provisions should be made for both constructive and legal obligations.
2. Discounting may be used when estimating the amount of a provision.
3. A restructuring provision must include the estimated costs of retraining or relocating continuing staff
4. A restructuring provision may only be made when a company has a detailed plan for the restructuring and has communicated to interested parties a firm intention to carry it out.

Which TWO of the following events which occur after the reporting date of a company but before the financial statements are authorised for issue are classified as ADJUSTING events in accordance with IAS 10 Events After the Reporting Period?

Hopewell Co sells a line of goods under a six-month warranty. Any defect arising during that period is repaired free of charge. Hopewell Co has calculated that if all the goods sold in the last six months of the year required repairs the cost would be $2 million. If all of these goods had more serious faults and had to be replaced the cost would be $6 million.

The normal pattern is that 80% of goods sold will be fault-free, 15% will require repairs and 5% will have to be replaced.

Using the drop down box options, select what is the amount of the provision required?

Which of the following events taking place after the year end but before the financial statements were authorised for issue would require adjustment in accordance with IAS 10 Events After the Reporting Period?

Candel Co is being sued by a customer for $2 million for breach of contract over a cancelled order. Candel Co has obtained legal opinion that there is a 20% chance that Candel Co will lose the case. Accordingly Candel Co has provided $400,000 ($2 million × 20%) in respect of the claim. The unrecoverable legal costs of defending the action are estimated at $100,000. These have not been provided for as the case will not go to court until next year.

What is the amount of the provision that should be made by Candel Co in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

Which of the following companies require provisions to be included in their financial statements?

1. Aston Ltd has a policy of cleaning up any environmental contamination caused by its operations, but is not legally obliged to do so.
2. Brum Ltd is leasing an office building for which it has no further use. However, the lease contract is non-cancellable and the office building cannot be sub-let to a third party.
3. Coleshill Co is closing down a division. The board has prepared detailed closure plans which have been communicated to customers and employees.
4. Dudley Co has acquired a machine which requires a major overhaul every three years. The cost of the first overhaul is reliably estimated at $120,000.

Tynan Co's year end is 30 September 20X4 and the following potential liabilities have been identified:

Which TWO of the above should Tynan Co recognise as liabilities as at 30 September 20X4?

During the year Peterlee Co acquired an iron ore mine at a cost of $6 million. In addition, when all the ore has been extracted (estimated ten years' time) the company will face estimated costs for landscaping the area affected by the mining that have a present value of $2 million. These costs would still have to be incurred even if no further ore was extracted.

How should this $2 million future cost be recognised in the financial statements?