On January 1, 2022, Nader Corp. purchased timberlands for $1,000,000 cash. Under the terms of the purchase agreement, once the timber has been cut and sold, it must restore the site to specified conditions at an estimated future cost of $50,000. There is no residual value for the timberlands. Nader estimates it will cut timber from the site for six (6) years before the site must be restored. It uses a 9% discount rate and rounds all calculations to the nearest whole dollar. A) The journal entry the company makes on 1/1/22 to record the asset retirement obligation should include which of the following? Credit to “Asset Retirement Obligation for $29,813. Credit to “Asset Retirement Obligation” for $50,000. Debit to “Asset Retirement Obligation” for $29,813. Debit to “Asset Retirement Obligation” for $50,000. Credit to “Note Payable” for $50,000. B) The entry to record accretion expense on the asset retirement obligation (ARO) for the year ending 12/31/22 should include which of the following: Debit to “Timberlands” for $2,683. Credit to “Asset Retirement Obligation” for $2,683. Credit to “Cash” for $2,683. Debit to “Accretion Expense” for $8,333. Credit to “Interest Payable” for $8,333.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter10: Property, Plant And Equipment: Acquisition And Subsequent Investments

Section: Chapter Questions

Problem 6RE

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On January 1, 2022, Nader Corp. purchased timberlands for $1,000,000 cash. Under the terms of the purchase agreement, once the timber has been cut and sold, it must restore the site to specified conditions at an estimated future cost of $50,000. There is no residual value for the timberlands. Nader estimates it will cut timber from the site for six (6) years before the site must be restored. It uses a 9% discount rate and rounds all calculations to the nearest whole dollar.

A) The journal entry the company makes on 1/1/22 to record the asset retirement obligation should include which of the following?

Credit to “Asset Retirement Obligation for $29,813.
Credit to “Asset Retirement Obligation” for $50,000.
Debit to “Asset Retirement Obligation” for $29,813.
Debit to “Asset Retirement Obligation” for $50,000.
Credit to “Note Payable” for $50,000.

B) The entry to record accretion expense on the asset retirement obligation (ARO) for the year ending 12/31/22 should include which of the following:

1. Debit to “Timberlands” for $2,683.
2. Credit to “Asset Retirement Obligation” for $2,683.
3. Credit to “Cash” for $2,683.
4. Debit to “Accretion Expense” for $8,333.
5. Credit to “Interest Payable” for $8,333.

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