Asset Retirement Obligation
Extraction Friendly Ltd. (EFL) specializes in extracting ore. It prides itself for following high environmental standards in the extraction process. On January 1, 2016, EFL purchased the rights to use a parcel of land from the province of New Brunswick. The rights cost $ 15,000,000 and allowed the company to extract ore for five years, i.e., until Dec 31, 2020. EFL expects to extract the ore evenly over the contract period. At the end of the contract, EFL has one year to clean up and restore the land. EFL estimates this will cost $ 2,000,000.
EFL uses a discounted cash flow method to calculate the fair value of this obligation and believes that 8% is the appropriate discount rate. EFL uses straight-line depreciation method. EFL uses the calendar year as its fiscal year and follows IFRS.
As a helpful suggestion, students may want to draw a timeline of events before solving the questions given below.
Instructions (Round all values to the nearest dollar.)
a) Prepare the journal entries to be recorded on January 1, 2016.
b) Prepare the journal entries to be recorded on December 31, 2016. Show the amounts and accounts to be reported on the classified statement of financial position at December 31, 2016.
c) Prepare the journal entries to be recorded on December 31, 2020. Show the amounts and accounts reported on the classified statement of financial position at December 31, 2020.
d) After 2020, EFL was supposed to clean up and restore the land. Even though the company spent a considerable amount of money on restoration, it was sued by the province of New Brunswick for not following the contract's requirements. On February 3, 2022, judgement was rendered against EFL for $ 3,000,000. The company claims that because the language in the contract was misleading regarding the restoration costs, it plans to appeal the judgement and expects the ruling to be reduced to anywhere between $ 1,000,000 and $ 2,000,000, with $ 1,500,000 being the probable amount. EFL has not yet released its 2021 financial statements. Discuss how EFL should report this matter on its financial statements for the year ended December 31, 2021.

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The Answer of Asset Retirement Obligation
Extraction Friendly Ltd. (EFL) specializes in extracting ore. It prides itself for following high environmental standards in the extraction process. On January 1, 2016, EFL purchased the rights to use a parcel of land from the province of New Brunswick. The rights cost $ 15,000,000 and allowed the company to extract ore for five years, i.e., until Dec 31, 2020. EFL expects to extract the ore evenly over the contract period. At the end of the contract, EFL has one year to clean up and restore the land. EFL estimates this will cost $ 2,000,000.
EFL uses a discounted cash flow method to calculate the fair value of this obligation and believes that 8% is the appropriate discount rate. EFL uses straight-line depreciation method. EFL uses the calendar year as its fiscal year and follows IFRS.
As a helpful suggestion, students may want to draw a timeline of events before solving the questions given below.
Instructions (Round all values to the nearest dollar.)
a) Prepare the journal entries to be recorded on January 1, 2016.
b) Prepare the journal entries to be recorded on December 31, 2016. Show the amounts and accounts to be reported on the classified statement of financial position at December 31, 2016.
c) Prepare the journal entries to be recorded on December 31, 2020. Show the amounts and accounts reported on the classified statement of financial position at December 31, 2020.
d) After 2020, EFL was supposed to clean up and restore the land. Even though the company spent a considerable amount of money on restoration, it was sued by the province of New Brunswick for not following the contract's requirements. On February 3, 2022, judgement was rendered against EFL for $ 3,000,000. The company claims that because the language in the contract was misleading regarding the restoration costs, it plans to appeal the judgement and expects the ruling to be reduced to anywhere between $ 1,000,000 and $ 2,000,000, with $ 1,500,000 being the probable amount. EFL has not yet released its 2021 financial statements. Discuss how EFL should report this matter on its financial statements for the year ended December 31, 2021.

Asset Retirement Obligation Extraction Friendly Ltd. (EFL) Specializes in Extracting Ore. It Prides