Asset retirement obligation
• LO10–1
Refer to the situation described in BE 10–4. What is the book value of the asset retirement liability at the end of one year? Assuming that the actual restoration costs incurred after extraction is completed are $596,000, what amount of gain or loss will Smithson recognize on retirement of the liability?
BE 10–4
Cost of a natural resource; asset retirement obligation
• LO10–1
Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a wildlife preserve. The company’s controller has provided the following three cash flow possibilities for the restoration costs: (1) $500,000, 20% probability; (2) $550,000, 45% probability; and (3) $650,000, 35% probability. The company’s credit-adjusted, risk-free rate of interest is 6%. What is the initial cost of the silver mine?
Want to see the full answer?
Check out a sample textbook solutionChapter 10 Solutions
INTERMEDIATE ACCOUNTING
- es Problem 12-27 (Algo) MACRS depreciation and net present value [LO12-4] Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12-11 to determine in what depreciation category the asset falls. (Hint: It is not 10 years.) The asset will cost $220,000, and it will produce earnings before depreciation and taxes of $72,000 per year for three years, and then $35,000 a year for seven more years. The firm has a tax rate of 25 percent. Assume the cost of capital is 14 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value. Note: Do not round intermediate calculations and round your answer to 2 decimal places. Net present value b. Based on the…arrow_forwardProblem 12-25 (Algo) MACRS depreciation and net present value [LO12-4] The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $390,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12 Year 1 Year 2 Year 3 Year 4 $ 206,000 254,000 86,000 78,000 The firm is in a 40 percent tax bracket and has a cost of capital of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value. Note: Negative amount should be Indicated by a minus sign. Do not round Intermediate calculations and round your answer to 2 decimal places. Net present value es b. Under the net present value method, should Summit Petroleum Corporation purchase the asset? Yes O Noarrow_forwardProblem 9-6 Calculating Salvage Value (LO 2] Consider an asset that costs $690,000 and is depreciated straight-line to zero over its 9- year tax life. The asset is to be used in a 6-year project; at the end of the project, the asset can be sold for $171,000. If the relevant tax rate is 21 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Aftertax salvage valuearrow_forward
- Q 9.51: Hamill Company purchased equipment on January 1, 2020, for $70,000. The equipment was expected to be used for four years and 12,000 hours (4,000 hours in 2020, 3,000 hours in 2021, and 2,500 hours per year for each of the last two years). Hamill hopes to sell the asset for $5,000 at the end of its useful life. Using the double-declining-balance method, what amount of depreciation expense should Hamill record for the year ended December 31, 2020? $17,500 $35,000 $32,500 $16,250 Question O Confidence SUBMIT O Mark for Review F10 F11 F4 F5 F6 F7 F8 F9 F3 H4 20 %23 6. 8.arrow_forwardCh 5. ABC Company has the following mutually exclusive projects. Year Project A Project B 0 -$19,520 -$16,800 1 11,500 9,500 2 8,750 7,100 3 2,500 3,500 If the company’s payback period is 2 years, which of these projects should be chosen? Group of answer choices Project A Neither Projects Both Projects Project Barrow_forwardQ 9.36: On April 1, 2014, Howard & Sons Law Firm, whose fiscal year-end is September 30, purchased a building for $1.4 million. The building was expected to remain in service for 50 years. It is being depreciated using the straight-line method. If the expected salvage value was $800,000, what will be the book value of the building on September 30, 2025? $1,092,000 $1,262,000 $1,078,000 Qu $1,268,000 Study - Apply plant as Hint O Mark for Review Confidence SUBMIT DELL F9 F10 F11 F3 F4 F5 F6 F7 F8 44 2# $4 6. 7 8. 3.arrow_forward
- FIN 6020 v20f Taylor Toy Corp Ch 11 (11-9) Taylor Toy Corp. is considering the replacement of it injection molding machine. It is 2 years old but new technology has it considering the newest model. The old (current) machine was acquired 2 years ago and is being depreciated on a straight line basis over 8 years (6 years remaining).The annual depreciation expense is $350 per year, and its current book value is $2,100. It can be sold for $2,500 today. If the machine is not replaced, it is expected to be sold for $500 at the end of its remaining life (6 yrs). The new, replacement machine will cost $8,000. It is expected to be used for 6 years, and is expected to be sold for $800 then. It will be depreciated using MACRS (5-year class with 2 year convention). The new machine is expected to support an increase in sales by $1,000 per year, and with its improved electrical efficiency, it should reduce operating expenses by $1,500 per year. Inventories will need to increase by $2,000 and Account…arrow_forwarduiz Instructions Question 26 Your company, RMU Inc., is considering a new project whose data are shown below. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. What is the project's Year 1 cash flow? Sales revenues $26,750 Operating costs $12,000 Tax rate 25.0% O $2,350 $4,345 $16,820 O $1,063 $18,125 « Previous Next > 80 888 esc F1 F2 F3 F4 F5 F6 F7 F8 F9 F10 # $ % & 1 2 3 4 5 6 8 Q W E R Y ab A S D G J K Jock N M H ntrol option command comma I LL Narrow_forwardQuestion 5 What is the after-tax salvage value of a 3-year MACRS machine with the $10,000 purchase price if it is sold after 3 years at a salvage value of $500? The annual depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%, and the tax rate is 25%. $741 $560.25 $935.25 -$241 O-$60.25arrow_forward
- Brief Exercise 11-13 (Algo) Amortization; Software development costs [LO11-4] On September 30, 2024, Athens Software began developing a software program to shield personal computers from malware and spyware. Technological feasibility was established on February 28, 2025, and the program was available for release on April 30, 2025. Development costs were incurred as follows: $ September 30 through December 31, 2024 January 1 through February 28, 2025 March 1 through April 30, 2025 Athens expects a useful life of four years for the software and total revenues of $7,600,000 during that time. During 2025, revenue of $1,520,000 was recognized. Required: 1. Prepare a journal entry to record the development costs in each year of 2024 and 2025. 2. Calculate the required amortization for 2025. Complete this question by entering your answers in the tabs below. Required Required 1 2 Prepare a journal entry to record the development costs in each year of 2024 and 2025. Note: If no entry is…arrow_forwardMCQ3 Smitty Inc. wishes to use the revaluation model for this property: Before Revaluation • Building Gross Value 120,000 • Building Accumulated Depreciation 40,000 • Net carrying value 80,000 The fair value for the property is $150,000. Assuming this is the first year of using the revaluation model, what amount would be booked to the Accumulated Depreciation account, if Smitty chooses to use the proportional method to record the revaluation?arrow_forwardGA E E 1 95 81F Clear Question 74 You have been asked to evaluate a pollution device. The device costs $500 to set up and $100 per year to operate. It must be completely replaced every 4 years, and it has no salvage value. Assume the pollution control equipment is replaced as it wears out, and the cost of capital is 12%. What is the EAC of the wet scrub device? A) $257.74 B) $264.62 $286.04 D) $296.93 E) $331.21 Last saved B:52:43 PM Questions Filter (74) # Q Search Darrow_forward
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT