Question

X Company purchases exploration rights for A on January 1, 2019 and has responsibility to restore the land after extraction is complete by December 31, 2026 (i.e., 8 years). There is a 40% chance restoration will cost $700,000, a 50% chance restoration will cost $900,000, and a 10% chance restoration will cost $1,500,000. All other costs associated with the A deposit total $1,750,000. The applicable interest rate is 8%.

What does company X record for cost of A?

Suppose the balance of X Company's asset retirement obligation on January 1, 2024, is $646,826. What does X record as accretion expense for the fiscal year ending December 31, 2024?

Answer 1

Part 1

	Restoration cost	Multiply: Probability	Expected value
40% chance	700,000	40%	280,000
50% chance	900,000	50%	450,000
10% chance	1,500,000	10%	150,000
Expected future value for retirement obligation			880,000

Year	PV factor @ 8%	Remarks
1	0.92593	= 1 / 1.08
2	0.85734	= 0.92593 / 1.08
3	0.79383	= 0.85734 / 1.08
4	0.73503	= 0.79383 / 1.08
5	0.68058	= 0.73503 / 1.08
6	0.63017	= 0.68058 / 1.08
7	0.58349	= 0.63017 / 1.08
8	0.54027	= 0.58349 / 1.08

Expected future value for retirement obligation			880,000
Multiply: Present Value Factor @ 8% for 8 periods			0.54027
Expected present value for retirement obligation			475,438

Journal entries
Date	General Journal	Debit	Credit
January 1, 2019	Exploration rights [Mineral right]	2,225,438
	Cash		1,750,000
	Asset retirement obligation		475,438
	(To record purchase of exploration rights.)

Part 2

Date	General Journal	Debit	Credit
December 31, 2024	Interest Expense [accretion expense]	51,746
	Asset retirement obligation		51,746
	(To record accretion expense.) (646826*8%)