Question

Roadrunner Co. is building a waste landfill in the desert near Phoenix, AZ. Roadrunner estimates that this landfill will be in operation for 4 years, will cost $175,000,000 to build, and will generate $600 million in revenues during its useful life. Federal law requires that Roadrunner decommission and decontaminate the site at the end of its useful life. A team of engineers has studied the decontamination procedure and has estimated that Roadrunner will have to spend $20,000,000 on the decommissioning process when the landfill is shut down four years from now. Roadrunner's credit-adjusted risk-free rate of interest is 10%; the PV factor for 4 periods at 10% equals 0.683013.

Required:

• In accordance with U.S. GAAP, how should Roadrunner Co. account for the costs associated with the decommissioning process? Prepare the journal entry required and prepare an amortization table for the asset retirement obligation.

• How are the costs associated with the decommissioning process reflected on the income statement? Explain how this accounting treatment improves the matching process.

Answer 1

The answer is given below.Thanks

	Requirement
1	In the present case R Co building a waste landfill and it estimated that useful life of landfill
	is 4 years and it cost $17500000 to build and generate revenue of $600 million over the useful
	life
	The company is required to decompose it after the usefule life which will cost the company for
	$20000000 .
	The credit adjusted rate of interest for the company is 10%
	The company is required to record an obligation as an asset retirement obligation as it is certain
	that the company should incur some cost to decommission the landfill.Engineers of company
	estimated the cost of decomposing.
	Hence the company should record it as an obligation at the present value of the future expenditures.
	The present value $20000000 with pv factor of 10% at the 4th period ie .854804 which results in
	$17096080 to be recorded as an asset retirement obligation
		Journal Entries
	SN	Account Title	Debit $	Credit $
		Asset Retirement Cost Landfill	$17,096,080
		Asset retirement obligation		$17,096,080
		To record the asset retirement obligation at its Present Value
	Preparing an amortization schedule as below;		10%	C +D
	Yr	Present Value ARO at 01/01	Accretion Expenses	Present Value ARO at 12/31
	1	$17,096,080	$1,709,608	$18,805,688
	2	$18,805,688	$1,880,568.80	$20,686,256.80
	3	$20,686,256.80	$2,068,625.68	$22,754,882.48
	4	$22,754,882.48	$2,275,488.25	$25,030,370.73
	5	$25,030,370.73	$2,503,037.07	$27,533,407.80
2	There is dual effect on the income statement of the company due to cost associated with the decomposing
	process.First is the depreciation expense which will be provided on the Asset retirement cost recorded
	above and second is accretion expense required to be recorded over the useful life as per the amortization
	table.
	The decomposing cost is shown as a part of the operating expenses of the landfill and these will get matched
	with the revenues generated by landfill over its useful life.
		Journal Entries
	SN	Account Title	Debit $	Credit $
		Accretion Expenses	$1,709,608
		Asset retirement obligation		$1,709,608
		to record the accretion expense for yr1