Question

On January ​1, Staley Utilities Company acquired a power plant at a total cost of $23,580,000​, and paid cash. The estimated cost​ (in today's​ market) to dismantle the plant and restore the property at the end of the​ plant's 15​-year life is $4,859,000 Staley's cost of capital is 2. Staley will depreciate the asset over its useful life using the​ straight-line method. The asset has no residual value.

Requirements:

a.	Prepare the journal entries required to record the acquisition of the plant asset.
b.	Prepare the journal entry to record the first​ year's depreciation and accretion accrual. Now journalize the first​ year's accretion accrual.
c.	Prepare the journal entries required to record the disposal of the asset and the settlement of the asset retirement obligation at the end of the fifth year after acquisition. Staley sold the asset for $16,007,000 and the costs of dismantling the plant and restoring the property totaled $5,420,000. Begin by journalizing the disposal of the asset at the end of the fifth year after acquisition. Now journalize the settlement of the asset retirement obligation at the end of the fifth year after acquisition.

Answer 1

a	Journal entry to record the acquisition of the plant asset
Date	Account title	Debit	Credit
1-Jan	Power Plant	$23,580,000
	Cash		$23,580,000
b	Journal entry to record first year's depreciation
Date	Account title	Debit	Credit
31-Dec	Depreciation expense	$1,572,000
	Accumulated depreciation-Power palnt		$1,572,000
	Cost of Power plant	$23,580,000
	Useful life	15
	Depreciation each year	$1,572,000
	Now we will caluculate the present value of asset retirement obligation
	Cost of dismantling and restoring the property	$4,859,000
	Cost of capital	2%
	Present value of $1 @ 2% on year 15	0.74301
	Present value of asset retirement cost	$3,610,286
	Journal entry to record accretion accrual
Date	Account title	Debit	Credit
31-Dec	Asset retirement cost	$3,610,286
	Asset retirement obligation		$3,610,286
	Journal entry to record first year's accretion accrual
31-Dec	Accretion expense ($3610286 x 2%)	$72,206
	Asset retirement obligation		$72,206
31-Dec	Depreciation expense	$240,686
	Accumulated depreciation-asset retirement cost		$240,686
c	Journal entry to record disposal of the asset
Date	Account title	Debit	Credit
31-Dec	Cash	$16,007,000
	Accumulated Depreciation-Power plant	$7,860,000
	Gain on disposal of asset		$287,000
	Power plant		$23,580,000
	Cost of Power plant	$23,580,000
	Depreciation for 5 years	$7,860,000
	Book value after 5 year	$15,720,000
	Sale price	$16,007,000
	Gain on sale of asset (16007000-15720000)	$287,000
	Journal entry to record the settlement of asset retirement obligation
31-Dec	Asset retirement obligation	$3,986,047
	Accumulated Depreciation-Asset retirement cost	$1,203,429
	Loss on settlement	$3,840,810
	Cash		$5,420,000
	Asset retirement cost		$3,610,286
	Asset retirement obligation balance
	Accretion expense	Balance at the end	Beginning Balance
Year 1			$3,610,286
Year 1	$72,205.72	$3,682,491.72
Year 2	$73,649.83	$3,756,141.55
Year 3	$75,122.83	$3,831,264.39
Year 4	$76,625.29	$3,907,889.67
Year 5	$78,157.79	$3,986,047.47