Successful Mining Company (SMC) specializes in extracting ore. It prides itself on following high environmental standards in the extraction process. On January 1, 2022, SMC purchased the rights to use a parcel of land from the province of New Brunswick. The rights cost $16,000,000 and allowed the company to extract ore for five years, i.e., until December 31, 2026. SMC expects to extract the ore evenly over the contract period. At the end of the contract, SMC is obligated to clean up and restore the land. SMC estimates this will cost $2,100,000.
SMC uses a discounted cash flow method to calculate the fair value of this obligation and believes that 6% is the appropriate discount rate. SMC uses the straight-line depreciation method. SMC 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, 2022. (4 marks)
b. Prepare the journal entries to be recorded on December 31, 2022. Show the amounts and accounts to be reported on the classified statement of financial position at December 31, 2022. (4 marks)
c. Prepare the journal entries to be recorded on December 31, 2026. Show the amounts and accounts reported on the classified statement of financial position at December 31, 2026. (4 marks)
d. After 2026, SMC 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. A judgment was rendered against SMC for $2,500,000. The company claims that because the language used in the contract was ambiguous, it is appealing the judgment and expects the ruling to be reduced to anywhere between $500,000 and $1,500,000, with $1,000,000 being the probable amount. SMC has not yet released its 2026 financial statements. Discuss how SMC should report this matter on its financial statements for the year ended December 31, 2026. (3 marks)
