- 7 Marks
CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)
Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.
Question
Gama Plastic Limited owns a number of plastic recycling plants in various parts of the country which supply most of the raw material used by Gama Plastic Limited for its production of household and corporate plastic products.
On December 1, 2015, the directors of Gama Plastic Limited announced publicly that it intends to voluntarily reduce the level of harmful emissions from its recycling plants through modifications of the plants.
The average useful economic life of these plants as of December 31, 2015, was 15 years. Gama Plastic Limited charges depreciation in relation to the recycling plants to cost of sales on a straight-line basis.
The directors believe that while the modifications will be effective from early 2016 onward, the actual cash costs of the modifications will be as follows:
| Date | Amount (N’000) |
|---|---|
| December 31, 2016 | 100,000 |
| December 31, 2017 | 80,000 |
| December 31, 2018 | 140,000 |
No contract was signed until 2016, but Gama Plastic Limited prides itself on its excellent public image and has a well-known reputation for meeting both legal and constructive obligations.
The directors of Gama Plastic Limited believe that it is appropriate to use discounted cash flow techniques and that an appropriate rate would be 10%, with the following discount factors:
| Year | PV Factor |
|---|---|
| 1 | 0.909 |
| 2 | 0.826 |
| 3 | 0.751 |
| 4 | 0.683 |
| 5 | 0.620 |
| 6 | 0.564 |
Required:
Assuming the actual cash cost of the modification is a reliable estimate, calculate the provisions that should be included in the statement of financial position and the charges to the statement of profit or loss of Gama Plastic Limited in respect of the proposal for each of the years 2015 and 2016. (7 Marks)
Find Related Questions by Tags, levels, etc.