Chapter 12 - SFAS. No. 143
Chapter 12
End-of-Chapter Material Relating to SFAS. No. 143
QUESTION:
1. What is an asset retirement obligation? What is the proper accounting for an asset retirement
obligation?
PRACTICE 1
ACCOUNTING FOR AN ASSET RETIREMENT OBLIGATION
The company purchased a mining site that will have to be restored to certain specifications when
the mining production ceases. The cost of the mining site is $800,000, and the restoration cost is
expected to be $200,000. It is estimated that the mine will continue in operation for 15 years. The
appropriate interest rate is seven percent. Make the appropriate journal entries to record the
purchase of the mining site and the recognition of the obligation to restore the mining site.
EXERCISE 1
ASSET RETIREMENT OBLIGATION
Simpson Company purchased a nerve gas detoxification facility. The
facility cost $900,000. The cost of cleaning up the routine contamination
caused by the initial location of nerve gas on the property is estimated to
be $1,300,000; this cost will be incurred in 20 years when all of the
existing stockpile of nerve gas is detoxified and the facility is
decommissioned. Additional contamination will occur each year that the
facility is in operation. In its first year of operation, that additional
contamination adds $100,000 to the estimated cleanup cost, which will
occur after 19 years (because one year has elapsed). Make the journal
entries necessary to record the purchase of the detoxification facility and
the recognition of the initial asset retirement obligation (assuming that
the appropriate interest rate is 7 percent). Also make the journal entry to
recognize the additional obligation created after one year.
PROBLEM 1
ASSET RETIREMENT OBLIGATION
Burns Company has purchased land that will serve as a temporary
repository for nuclear waste. The site will function for 30 years, at which
time Burns will be required to completely decontaminate the land. The
purchase price for the land is $500,000. Burns knows that the land will
have to be decontaminated, but isn’t sure which of several possible
approaches will be sufficient to reach the level of decontamination
necessary by law. The costs of each approach, and the estimated
probability that the approach will be the one used, are given below:
10% probability of total decontamination cost of $5,000 at the end of 30 years.
20% probability of total decontamination cost of $100,000 at the end of 30 years.
70% probability of total decontamination cost of $1,500,000 at the end of 30
Approach 1
Approach 2
Approach 3
years.
The appropriate interest rate is 8 percent.
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Chapter 12 - SFAS. No. 143
Instructions:
Make the journal entries necessary to record the purchase of the land and the recognition of the
asset retirement obligation.
7. How does the recognition of an asset retirement obligation impact periodic depreciation
expense? Interest expense?
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