Question

Recording Asset Retirement Obligation Martina Company is in the first year of building a storage facility...

Recording Asset Retirement Obligation

Martina Company is in the first year of building a storage facility that will contain hazardous building materials. The company is required to remove the storage facility and dispose of its contents at the end of 10 years, which is the useful life of the facility. Martina estimates the dismantling and removal costs to be $120,000 in 10 years. Prepare the journal entry, if any, that is recorded in this first year relating to the restoration costs. The appropriate discount rate is 9%.

  • Note: Round your answer to the nearest whole number.
  • Note: If a line in a journal entry isn't required for the transaction, select "N/A" as the account name and leave the Dr. and Cr. answers blank (zero).
Account Name Dr. Cr.
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Answer #1

Solution :

When a assets is retired and it is expected that the retirement would involve cost, then this cost shall be included in the value of assets acquired. We have to calculate the present value of Assets Retirement Cost and the Present Value will be added in carrying value of assets.

Assets Retirement Obligation :

Dismantling and removal costs $ 120,000
PV Discount Factor (9%, 10 Years) 0.42241
Present Value of Obligation $ 50,689

Journal Entry :

Particulars Debit Credit
Building - Storage Facility $ 50,689
Provision for Asets Retirement Obligation $ 50,689

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