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Whta the asset retirement obligation

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Reference no: EM132816446

On January 1, 2020, UML Resources entered into an agreement with the state of Alaska to obtain the rights to operate a mineral mine for $8 million. As part of the agreement, UML agrees to restore the land to its original condition after mining operations are completed in approximately ten years.

Management has provided the following possible outflows for the restoration costs that will occur ten years from now:

Cash Outflow      Probability

$100,000               10%
$200,000            50%
$300,000          40%

Problem 1: UML's credit-adjusted risk-free interest rate is 6%. The asset retirement obligation (rounded) that should be recognized by UML at the beginning of the extraction activities is:

Multiple Choice

Option 1: $335,034.
Option 2: $230,000.
Option 3: $128,430.
Option 4: $111,678.

Reference no: EM132816446

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