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QUESTION $1(50$ marks$)$

Quarry Ltd$.$ is a mining company with several locations throughout Europe. Since its

inception, they have always abided by the regulations of the various countries. With

the introduction of Sustainability reporting, the board is currently discussing what

should be included in their financial statements. They firmly believe that if they were

to include details on preservation policies such as zero tolerance for pollution.

conservation of wildlife, reforestation and recycling, their reputation would be

enhanced. This is very important to them since their activities cause significant

damage to the environment, including deforestation. They are eager to come to a

consensus especially since they have never embarked on such activities.

On January $1,2015,$ Quarry Ltd$.$ acquired the rights to mine a site at a cost of $$?00$

million. The site is expected to be decommissioned in $30$ years from the date of

acquisition. At the end of the $30$ years, there is no residual value and legislation

requires Quarry Ltd to decommission the site once mining operations are completed.

After $1$ year of site preparation, the mine became operational as of January $12016.$

The mine is situated in a country where there is no environmental legislation obliging$/$require

companies to rectify environmental damage and it is very unlikely that any such

legislation will be enacted within $30$ years.

It has been estimated that the cost to decommission the mine is $$50$ million. The cost

of restoring the site will be $$30-$million. The company's cost of capital is $7\%$ and its year

end is December ${31}^{st}.$ Quarry Ltd uses straight line depreciation for its non$-$current

assets.

$50+30=80$ min. $PV$

Mining operations ended as scheduled and the costs to decommission and restore

the site in $2045$ were $$55$ million and $$20$ million respectively.

Requirements:

a$)$ Explain if a provision should be made for:

$($i$)$ the decommissioning of the mine and

$(10$ marks$)$

$($ii$)$ the cost of restoring the site.

$(10$ marks$)$

b$)$ Prepare the necessary journal entries for the years ended December $2015$ &

$2016$ Show all workings.

$(22\mathrm{.}5$ marks

c$)$ Prepare the journal entries for year ended December $31,2045$ Show all

workings

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