Your client, Portsmouth Mining, recently entered into an agreement to obtain the rights to operate a coal mine in Virginia for $15 million. Portsmouth incurred development costs of $6 million in preparing the mine for extraction, which began on Jul 1, 2021. The contract requires Portsmouth to restore the land and surrounding area to its original condition after extraction is complete in three years. The company controller, Anna Dickson, is not sure how to account for the restoration costs and has asked your advice. Anna is aware of an accounting standard addressing this issue, but is not sure of its provisions. She has narrowed down the possible cash outflows for the restoration costs to four possibilities. Cash Outflow Probability $ 3 million 20% $ 4 million 30% $ 5 million 25% $ 6 million 25% Anna also informs you that the company’s credit-adjusted risk-free interest rate is 9 %. Before responding to Anna, you need to research the issue. a. Using the FASB codification determine the specific Codification citation for each of the following: a. accounting for asset retirement obligations, b. recognition criteria related to asset retirement obligations, c. the requirement to recognize the fair value of the asset retirement obligation as a liability, and d. how to treat the capitalized cost of the asset retirement obligation for the related tangible long-lived asset. Determine the capitalized cost of the coal mine. Prepare a summary journal entry to record the acquisition costs of the mine.
Your client, Portsmouth Mining, recently entered into an agreement to obtain the rights to operate a coal mine in Virginia for $15 million. Portsmouth incurred development costs of $6 million in preparing the mine for extraction, which began on Jul 1, 2021. The contract requires Portsmouth to restore the land and surrounding area to its original condition after extraction is complete in three years. The company controller, Anna Dickson, is not sure how to account for the restoration costs and has asked your advice. Anna is aware of an accounting standard addressing this issue, but is not sure of its provisions. She has narrowed down the possible cash outflows for the restoration costs to four possibilities.
$ 3 million 20%
$ 4 million 30%
$ 5 million 25%
$ 6 million 25%
Anna also informs you that the company’s credit-adjusted risk-free interest rate is 9 %. Before responding to Anna, you need to research the issue.
- a. Using the FASB codification determine the specific Codification citation for each of the following: a. accounting for asset retirement obligations, b. recognition criteria related to asset retirement obligations, c. the requirement to recognize the fair value of the asset retirement obligation as a liability, and d. how to treat the capitalized cost of the asset retirement obligation for the related tangible long-lived asset.
- Determine the capitalized cost of the coal mine.
- Prepare a summary
journal entry to record the acquisition costs of the mine. - How much accretion expense will the company record in its income statement for the 2021 fiscal year related to this transaction? Determine the specific Codification citation for each of the following, based on the format indicated, a. the calculation of accretion expense and b. the classification of accretion expense in the income statement.
- Explain to Anna how Portsmouth would account for the restoration if the restoration costs differed from the recorded liability in three years. By way of explanation, prepare the journal entry to record the payment of the retirement obligation in three years assuming that the actual restoration costs were $ 4.7 million.
- Describe to Anna the necessary disclosure requirements for the obligation. What specific Codification citation contains these disclosure requirements?
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How much accretion expense will the company record in its income statement for the 2021 fiscal year related to this transaction? Determine the specific Codification citation for each of the following, based on the format indicated, a. the calculation of accretion expense and b. the classification of accretion expense in the income statement.
- Explain to Anna how Portsmouth would account for the restoration if the restoration costs differed from the recorded liability in three years. By way of explanation, prepare the
journal entry to record the payment of the retirement obligation in three years assuming that the actual restoration costs were $ 4.7 million. - Describe to Anna the necessary disclosure requirements for the obligation. What specific Codification citation contains these disclosure requirements?
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