Reference no: EM132594359

Question - Asset Retirement Obligations

Fairfax Inc. is legally responsible for decontamination procedures associated with operating a chemical plant it acquired on January 1, 2001 for $60,000,000. The acquisition cost was attributed as follows: $54,000,000 for the plant and $6,000,000 for the land. The future cash flows for decontamination were analyzed and estimated to be $6,772,780. The credit-adjusted risk-free rate is 5%. The expected useful life of the plant is 25 years. At the end of its useful life and after decontamination, the plant should be worth $4,000,000 (not including the value of the land).

Fairfax uses straight-line method to depreciate buildings and manufacturing facilities.

1. What amount of depreciation expense should be recognized for 2001?

2. What amount will be recognized as accretion expense for 2001?

3. What is the ending balance in the asset retirement obligation on 12-31-01?

4. What amount will be recognized as accretion expense for 2002?

5. What is the ending balance in the asset retirement obligation on 12-31-02?

6. Provide all necessary journal entries for 2001 (3 Journal Entries).