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Marin Industries Limited purchased a strip mine for cash on April 1, 2020 at a cost of $5,000,000
Marin Industries Limited purchased a strip mine for cash on April 1, 2020 at a cost of $5,000,000. Marin expects to operate the mine for 10 years, at which it is legally required to restore the surrounding area to its original state. It is estimated that it will cost $450,000 at the end of the mine's useful life. The company's year-end is December 31, and Marin follows ASPE.
Requirements:
A- Prepare the journal entry to record the purchase of the mine and to record the asset retirement obligation for the mine on April 1, 2020. Based on the effective interest rate of 5%, the present value of the asset retirement obligation (i.e., its fair value) on the date of acquisition is $276,261
B- What are the journals entries required for the mine (straight-line depreciation) and the asset retirement obligation at December 31, 2020. The estimated residual value of the mine is zero.
C- On April 1, 2030, Marin paid cash to an environmental firm to restore the mine's surrounding area to its original state at a cost of $460,000. Prepare the journal entry for the settlement of the asset retirement
Thank you for your time in advance :)
Expert Solution
1)
| Date | Account Titles and Explanation | Debit | Credit |
| Jan. 1, 2020 | Strip Mine | $5,000,000 | |
| Cash | 5,000,000 | ||
| (To record the strip mine) | |||
| Jan. 1, 2020 | Strip Mine | 276,261 | |
| Asset Retirement Obligation | 276,261 | ||
| (To record asset retirement obligation.) |
2)
| Date | Account Titles and Explanation | Debit | Credit |
| Dec. 31, 2020 | Depreciation Expense ($5,000,000 / 10) | 500000 | |
| Accumulated Depreciation | 500000 | ||
| (To record depreciation on the depot.) | |||
| Dec. 31, 2020 | Depreciation Expense ($276,261 / 10) | 27,626 | |
| Accumulated Depreciation | 27,626 | ||
| (To record depreciation on asset retirement obligation.) | |||
| Dec. 31, 2020 | Interest Expense ($276,261*5%) | 13,813 | |
| Asset Retirement Obligation | 13,813 | ||
| (To record interest on asset retirement obligation.) |
3)
| Date | Account Titles and Explanation | Debit | Credit |
| Apr. 1, 2030 | Asset Retirement Obligation | $450,000 | |
| Loss on ARO Settlement | $10,000 | ||
| To Cash | $460,000 | ||
| (To record settlement for ARO) |
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