Extraction Friendly Ltd. (EFL) specializes in extracting ore. It prides itself for following high environmental standard

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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.
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.