Reference no: EM13999193
Your client, Hazelton Mining, recently entered into an agreement to obtain the rights to operate a coal mine in West Virginia for $15 million. Hazelton incurred development costs of $6 million in preparing the mine for extraction, which began on July 1, 2011. The contract requires Hazelton to restore the land and surrounding area to its original condition after extraction is complete in three years.
The company controller, Alice Cushing, is not sure how to account for the restoration costs and has asked your advice. Alice is aware of a recent accounting pronouncement 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:
Alice also informs you that the company's credit-adjusted risk-free interest rate is 9%. Before responding to Alice, you need to research the issue.
Required:
1. Obtain the relevant authoritative literature on accounting for asset retirement obligations using the FASB's Codification Research System. You might gain access at the FASB website (www.fasb.org). Explain the basic treatment of asset retirement obligations. What are the specific citations that you would rely on to determine
(a) The accounting treatment for an asset retirement obligation and
(b) How to measure the obligation?
2. Determine the capitalized cost of the coal mine.
3. Prepare a summary journal entry to record the acquisition costs of the mine.
4. How much accretion expense will the company record in its income statement for the 2011 fiscal year, related to this transaction? What are the specific citations from the FASB's Codification Research System that address
(a) The calculation of accretion expense and
(b) The classification of accretion expense in the income statement?
5. Explain to Alice how Hazelton 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.
6. Describe to Alice the necessary disclosure requirements for the obligation. What is the specific citation from the FASB's Codification Research System that contains these disclosure requirements?