Chapter 10, Problem 10.5BE

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?