Question

Part a Donahue Ltd purchased a plant on 1 July 2018 for N$300 000. The entity incurred transfer fees of N$90 000. The expected dismantling cost at the end of the useful life of the plant is N$200 000. • The applicable discount rate after tax (tax rate 25.75%) 6.3% • Useful life 12 years The plant is erected on rented premises and the rental agreement requires dismantling of the plant at the end of its useful life. Assume that Inland Revenue services gives a 25% allowance on the plant and allows a deduction when dismantling costs are paid. The dismantling costs are reassessed on 1 July 2019 at N$220 000. Required: 1.1 Prepare journal entries relating to the change in dismantling cost estimate on 16 July 2019

Answer 1

Cost	-300000
Transfer fees	-90000
Dismantling costs	-200000
Present value as on 1st July 2018
Dismentaling costs			Allowance
Future value	200000		Future value	75000
Rate	6.30%		Rate	6.30%
Useful life	12 years		Useful life	12 years
Present value	= Future Value/(1+r)^n		Present value	= Future Value/(1+r)^n
	=200000*1/(1+0.063)^12			=75000*1/(1+0.063)^12
	=200000*0.480			=75000*0.480
	=96080			=36000
Net costs	=96080-36000	60080
Present value as on 1st July 2019
Future value	220000
Rate	6.30%
Useful life	11 years
Present value	= Future Value/(1+r)^n		Present value	= Future Value/(1+r)^n
	=220000*1/(1+0.063)^12			=75000*1/(1+0.063)^11
	=220000*0.511			=75000*0.511
	112345			38325
Net costs	=112345-38325	74020

	Debit	Credit
Plant	13940
To Dismantalling liability		13940