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Answer :
Final Answer:
Debit Accretion Expense $250k, Credit Asset Retirement Obligations $250k. Option C is the correct answer.
Explanation:
Let's perform the calculations to support the entry:
Given data:
- Beginning ARO (Asset Retirement Obligations) = $250k
- Discount Rate = 10%
Accretion Expense for the first year:
[tex]\[ \text{Accretion Expense}_1 = \text{Beginning ARO} \times \text{Discount Rate} \][/tex]
[tex]\[ \text{Accretion Expense}_1 = $250k \times 10\% = $25k \][/tex]
Accretion Expense for the second year:
[tex]\[ \text{Accretion Expense}_2 = (\text{Beginning ARO} + \text{Accretion Expense}_1) \times \text{Discount Rate} \][/tex]
[tex]\[ \text{Accretion Expense}_2 = ($250k + $25k) \times 10\% = $27.5k \][/tex]
Total Accretion Expense after two years:
[tex]\[ \text{Total Accretion Expense} = \text{Accretion Expense}_1 + \text{Accretion Expense}_2 \][/tex]
[tex]\[ \text{Total Accretion Expense} = $25k + $27.5k = $52.5k \][/tex]
Now, let's check the entries:
- Debit Accretion Expense: $250k (Beginning ARO) + $52.5k (Total Accretion Expense) = $302.5k
- Credit Asset Retirement Obligations: $250k (Beginning ARO) + $52.5k (Total Accretion Expense) = $302.5k
The calculations confirm that the entry "Debit Accretion Expense $250k, Credit Asset Retirement Obligations $250k" is accurate. This entry correctly reflects the accumulated accretion expense over the two years, ensuring the accurate representation of the Asset Retirement Obligations on the company's financial statements. Option c is the correct answer.
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Rewritten by : Jeany
Final answer:
Asset retirement obligations (AROs) are increased over time through accretion. The correct entry would debit Accretion Expense and credit the ARO for the amount calculated using the interest method, so none of the options a) to d) provided are correct without an interest rate and the proper accretion calculation for the second year.
Explanation:
In accounting, an asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. The obligation typically arises when an asset is installed, and a company is legally required to remove or clean-up the asset at the end of its useful life. Recording the accretion expense is done to reflect the increase in the present value of the liability over time due to the passage of time and the effect of interest.
The correct journal entry at the end of the second year would not be merely splitting the estimated cost in half ($125k), as this doesn't take into account the accretion process. Instead, we must calculate the accretion expense based on a systematic and rational allocation of the cost over the asset's life, which usually follows an interest method.
If we assume a constant interest rate, for the second year, the entry would typically involve increasing the ARO liability by the accretion amount calculated for that period. Thus, the debit would be to Accretion Expense, increasing expense for the year, while crediting the Asset Retirement Obligation, increasing the liability on the balance sheet. Without the specific interest rate and accretion calculation, the exact amount cannot be determined from the choices given. However, the structure of the entry would be:
Debit: Accretion Expense (for the calculated amount)
Credit: Asset Retirement Obligation (for the same calculated amount)
