Question

Huaraz incorporated built a small power plant on the land it owns. Construction was completed on 1 January 2019. The plant will be operating for the next 20 years. At the end of the 20 years, Huaraz will be required to incur an estimated cost of $5 million to restore the land. this is required by government legislation. The interest rate that reflects the risk to Huaraz is 8%.

Required:

Provide the journal entry for the restoration costs on 1 January 2019.

Provide all required adjusting journal entries on 31 December 2019.

Answer 1

Journal entry on 01/01/2019

Plant A/c. Dr.

To work in progress A/c

To provision for restoration A/c

(Being amount from work in progress account transferred to Plant account and Also a provision created for the decommissioning of the plant and same is debited to the value of the plant)

Journal Entry on 31/12/3019

Depreciation A/c. Dr

To Plant A/c.

(Being depreciation made for the year)

Finance cost A/c. Dr.

To Provision for restoration A/c

(Being the inflation risk or other value changes due to change in the present value index is adjusted to the provision A/c)