On 1st April, 2020, Peacock Ltd. started its manufacturing operations by installing a machine in the rented premises. The estimated life of the…

(i) Accounting Treatment The present value of such decommissioning and site restoration obligation at the end of 4th year is 4,41,000 [being 6,00,000 / (1.08)4]. Peacock Ltd. will recognize the present value of decommissioning liability of 4,41,000 as an addition to cost of PPE and will also recognize a corresponding decommissioning liability. Further, the entity will recognize the unwinding of discount as finance charge every year till the estimated life of the machine. (ii) Journal Entries Date Particular Dr. (₹) Cr. (₹) 1 st April, 2020 Machine A/c (PPE) Dr. 4,41,000 To Provision for decommissioning liability 4,41,000 (Being the present value of decommissioning liability of 4,41,000 recognized as an addition to cost of PPE with corresponding recognition to decommissioning liability) 31 st March, 2021 Finance charge Dr. 35,280 To Provision for decommissioning liability 35,280 (Being the unwinding of discount as finance charge recognized at the end of Year 1) Profit and Loss A/c Dr. 35,280 To Finance charge 35,280 (Being Finance charge transferred to Profit & Loss A/c) 31 st March, 2022 Finance charge Dr. 38,102 To Provision for decommissioning liability 38,102 (Being the unwinding of discount as finance charge recognized at the end of Year 2) Profit and Loss A/c Dr. 38,102 To Finance charge 38,102 (Being Finance charge transferred to Profit & Loss A/c) 31 st March, 2023 Finance charge Dr. 41,151 To Provision for decommissioning liability 41,151 (Being the unwinding of discount as finance charge recognized at the end of Year 3) Profit and Loss A/c Dr. 41,151 To Finance charge 41,151 (Being Finance charge transferred to Profit & Loss A/c) 31 st March, 2024 Finance charge Dr. 44,467 To Provision for decommissioning liability 44,467 (Being the unwinding of discount as finance charge recognized at the end of Year 4) Profit and Loss A/c Dr. 44,467 To Finance charge 44,467 (Being Finance charge transferred to Profit & Loss A/c) Provision for decommissioning liability Dr. 6,00,000 To Bank A/c 6,00,000 (Being decommissioning liability incurred at the end of the life of the machine i.e. 4th year) Working Note: The following table shows the unwinding of discount Year Opening Decommissioning Liability Unwinding of Interest @ 8% Closing Decommissioning Liability 1 4,41,000 35,280 4,76,280 2 4,76,280 38,102 5,14,382 3 5,14,382 41,151 5,55,533 4 5,55,533 44,467* 6,00,000 *Difference of 24 (44,467- 44,443) is due to rounding off.