ExpertMedium1 markMultiple Choice
CPA · Question 29 · Area II: Balance Sheet Accounts
On January 1, Year 1, Oil Co. installed a platform. It is legally required to dismantle the platform at the end of its 10-year life. <br/>- Estimated dismantling cost: $100,000<br/>- Present value of dismantling cost at 10%: $38,550<br/><br/>What amount of accretion expense should be reported for Year 1?
On January 1, Year 1, Oil Co. installed a platform. It is legally required to dismantle the platform at the end of its 10-year life. <br/>- Estimated dismantling cost: $100,000<br/>- Present value of dismantling cost at 10%: $38,550<br/><br/>What amount of accretion expense should be reported for Year 1?
Answer options:
A.
$3,855
B.
$10,000
C.
$6,145
D.
$0
How to approach this question
Asset Retirement Obligation (ARO) is recorded at Present Value. The liability grows to the future value over time. This growth is 'Accretion Expense'. <br/>Accretion = Liability Balance * Interest Rate.
Full Answer
A.$3,855✓ Correct
A
The ARO liability is initially recorded at present value ($38,550). Accretion expense is the increase in the liability due to the passage of time. <br/>Accretion Expense = $38,550 × 10% = $3,855.
Common mistakes
Confusing accretion (liability growth) with depreciation (asset expense).
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