Asset Retirement

Question 1

What is the journal entry to record initial liability of asset retirement obligation?

Answer 1

DR Carry Value of Related Asset

CR Legal Liability

Question 2

What are the reasonable estimate rules in regards to asset retirement obligation?

Answer 2

If a reasonable estimate of fair value can be made, recognize the fair value in the period in which the obligation is incurred

If estimate cannot be made, recognized in the first period in which a reasonable estimate can be made

Question 3

How to calculate Asset Retirement Obligation

Answer 3

Total Obligation
Plus Undiscounted Cash Flows - (replace with Discounted flow Estimates)
Plus Accretion Expense
Minus Payment

Question 4

What situations are considered retirement?

Answer 4

Sale

Abandonment

Retirement

Disposal

Other than “Temporary”

Question 5

How to calculate retirement expense for a year?

Answer 5

Annual Amortization of estimated cost (Cost divided by useful life)

plus any unexpected expense.

Question 6

How to calculate the Accreation Expense?

Answer 6

FV of the liability for the asset retirement obligation

times credit-adjusted risk-free interest rate