Answered: During the year Gambler acquired an…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 17P

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Question

During the year Gambler 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?

Select one alternative

Provision $2 million and $2 million capitalized as part of cost of mine
Should not be recognized as no cost has yet arisen
Provision $2 million and $2 million charged to operating costs
Accrual $200,000 per annum for next ten years

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