Reference no: EM133001811

River Spray Company was organized to grow cranberries. They entered into an agreement with a landowner to lease 125 acres to develop a cranberry bog. The agreement states that River Spray will be obligated to transform the land back to its original condition at the end of the five-year agreement. Prior to receiving the permit, River Spray submitted a legally binding plan that included a timetable for the full reclamation process. After the end of five years, River Spray will restore the land to its original condition.

River Spray has made the following estimates:

1. Labor costs to drain the bog are presently $22 hour but could increase anywhere between 7 and 14%.
2. The labor hours associated with draining the bog are approximately 10 to 15 hours per acre.
3. Labor costs to backfill the soil removed are estimated at 25 to 30 hours per acre.
4. The acreage will have to be reseeded, which will cost approximately $800 an acre.
5. Native tree seedlings will have to be planted at a cost of $20,000 and labor of $1,500 per acre.
6. An additional $200,000 to $300,000 is estimated for damages caused by air and water pollution.
7. Wildlife will also have to be restored at a cost of $150,000.
8. Overhead costs should be approximately 70% of total labor.
9. The risk-free rate is presently 2%.
10. Inflation is estimated to be approximately 2%.

Problem 1: State the amount PDC should recognize related to this asset retirement obligation. Include an Excel schedule and calculations as presented in the Asset Retirement Obligations article.