Asset Retirement Obligations
Lesson:
Capital assets don't usually go away.
Sometimes you can sell them for a profit.
In other cases, you have to pay to shut them down.
Think about a hazardous materials site or a junkyard. Shutting down either of them would require significant expenditures to make them safe.
Fortunately, we can often predict how much these closing activities will cost. As a result, we can record an estimated cost when we stick the assets on our books and then track the expense incurred each year.
You're an accountant, trying to explain an asset retirement obligation to a firm's owner.
This is what you've been told:
- The discount rate is 7%.
- The time until retirement is 4 years.
- The present value is $70,949.25.
- The future value is $93,000.00.
What are the initial journal entries to add the asset retirement obligation to the balance sheet?
Answer:
-
Initial J/E for ARO Capital Asset $70,949.25 Asset Retirement Obligation $70,949.25
Explanation:
- Find the present value of the ARO.
PRESENT VALUE = $70,949.25 - Debit the capital asset account, and credit the ARO account.
Initial J/E for ARO Capital Asset $70,949.25 Asset Retirement Obligation $70,949.25