ExpertMedium1 markMultiple Choice
CPA · Question 30 · Area II: Balance Sheet Accounts
A company constructs a nuclear plant. It is legally required to dismantle it after 20 years. <br/>Estimated remediation cost in 20 years: $10,000,000.<br/>Present value of that cost at construction date: $2,000,000.<br/><br/>What is the journal entry to record the Asset Retirement Obligation (ARO) at the start?
A company constructs a nuclear plant. It is legally required to dismantle it after 20 years. <br/>Estimated remediation cost in 20 years: $10,000,000.<br/>Present value of that cost at construction date: $2,000,000.<br/><br/>What is the journal entry to record the Asset Retirement Obligation (ARO) at the start?
Answer options:
A.
Debit Plant Asset $2,000,000; Credit ARO Liability $2,000,000
B.
Debit Expense $2,000,000; Credit ARO Liability $2,000,000
C.
Debit Plant Asset $10,000,000; Credit ARO Liability $10,000,000
D.
No entry until retirement.
How to approach this question
ARO is recorded at Fair Value (Present Value of future cash flows) as a Liability. The offset is added to the Carrying Amount of the related Asset (ARC - Asset Retirement Cost).
Full Answer
A.Debit Plant Asset $2,000,000; Credit ARO Liability $2,000,000✓ Correct
A
Debit the Asset (Asset Retirement Cost) and Credit the Liability (ARO) for the Present Value of the estimated future expenditure ($2,000,000).
Common mistakes
Recording at undiscounted amount; expensing immediately.
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