Question

On January 1, 2018, DD Mining finished construction of a coal mine in Kentucky. DD is legally required to remove any metal used in building the mine, seal the entrance, and to the extent possible, restore the surrounding area to its natural condition at the end of the mine's 20 year useful life. DD estimates this process will cost $1,500,000. Assuming the current discount rate is 4%, one of entries DD needs to make in 2018 for this Asset Retirement Obligation is

Select one:

Debit Interest Expense 60,000

Credit Accumulated Depreciation 34,229

Debit Depreciation Expense 75,000

Debit Asset Retirement Obligation 684,585

Credit Asset Retirement Obligation $1,500,000

Answer 1

One of entries DD needs to make in 2018 for this Asset Retirement Obligation is as follows:

Present Value of process cost = $1,500,000 * ( 4%, 20 Years)

                                = $1,500,000 * 0.4563869

                              = $684,580

Depreciation Expenses p.a = $684,580 / 20 Years

                                         = $34,229

One of entries DD needs to make in 2018 for this Asset Retirement Obligation is

Account and Explanation	Debit($)	Credit($)
Depreciation Expenses	34,229
Accumulated Depreciation		34,229
(Recorded the depreciation expenses )

So Depreciation Expenses is debited $34,229 and Accumulated Depreciation is credited 34,229

So correct answer is option (2) or Credit Accumulated Depreciation 34,229