FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Related questions
Question
Murphy Mining Company recently purchased a quartz mine that it intends to work for the next 10 years. According to state environmental laws, Murphy must restore the mine site to its original natural prairie state after it ceases mining operations at the site. To properly account for the mine, Murphy must estimate the fair value of this asset retirement obligation. This amount will be recorded as a liability and added to the value of the mine on Murphy’s books. (You will learn more about these asset retirement obligations in Chapters 10 and 13.)
There is no active market for retirement obligations such as these, but Murphy has developed the following cash flow estimates based on its prior experience in mining-site restoration. It will take 3 years to restore the mine site when mining operations cease in 10 years. Each estimated
| Restoration Estimated Cash Outflow |
Probability Assessment |
|
| $15,000 | 10% | |
| 22,000 | 30% | |
| 25,000 | 50% | |
| 30,000 | 10% |
Instructions
a. What is the estimated fair value of Murphy’s asset retirement obligation? Murphy determines that the appropriate discount rate for this estimation is 5%. Round calculations to the nearest dollar.
b. Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 2 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $19,100. Use of the truck will require an increase in NWC (spare parts inventory) of $1,100. The truck will have no effect on revenues, but it is expected to save the firm $17,200 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Year 1 2 3 FCFarrow_forwardPresented below is selected information for Sheridan Company. Answer the questions asked about each of the factual situations. (Do not leave any answer field blank. Enter O for amounts.) 1. Sheridan purchased a patent from Vania Co. for $1,160,000 on January 1, 2018. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2028. During 2020, Sheridan determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2020? The amount to be reported $ 2. Sheridan bought a franchise from Alexander Co. on January 1, 2019, for $330,000. The carrying amount of the franchise on Alexander's books on January 1, 2019, was $330,000. The franchise agreement had an estimated useful life of 30 years. Because Sheridan must enter a competitive bidding at the end of 2021, it is unlikely that the…arrow_forwardTGIF Company owned a building on January 01, 2019, with historical cost of 52,000,000. The property is depreciated over 40 years on a straight-line basis with no residual value. The entity adopted a policy of revaluation of property. The building had so far been revalued twice at fair value. The fair values of the building are as follows: January 01, 2020 : 60,840,000 January 01, 2022 : 72,150,000.How much is the revaluation surplus to be reported in the statement of changes in equity for the year ended December 31, 2022? a. 23,660,000 b. 23,400,000 c. 24,050,000 d. 24,570,000arrow_forward
- A company purchased a new forging machine to manufacture disks for airplane turbine engines. The new press cost $3,800,000, and it falls into the seven-year MACRS property class. The company has to pay property taxes to the local township for ownership of this forging machine at a rate of 1.2% on the beginning book value of each year.(a) Determine the book value of the asset at the beginning of each tax year.(b) Determine the amount of property taxes over the machine's depreciable life.arrow_forwardOn April 20, 2020, Wilhamette Incorporated purchased the right to remove timber from a 20,000-acre tract of land in Oregon over the next three years, and the company estimates no residual value. The timber is to be sold as lumber for new home construction. The cost of the timber rights was $600,000, with estimated salable timber feet of 800,000. During 2020 and 2021, Wilhamette harvested and sold 650,000 feet of timber. What is the book value of the timber rights at the end of 2021, assuming the company uses the units-of-production method?arrow_forwardSam Ltd owns a piece of vacant land in Broadmeadows. A substantial number of factory owners establish their manufacturing plant in this location due to its accessibility and high affordability. The management of Sam Ltd wants to adopt fair value model to measure the land on 30 June 2021. Which of the following information is most useful in assisting management in estimating the fair value of the land? Group of answer choices Sam Ltd intends to lease out the land in the next financial year, and they believe they could receive an annual lease payment of $50,000. A factory owner purchased a piece of vacant land near Broadmeadows for $1m to build a new factory plant on 21 May 2021. The cost to build a new factory on a piece land in Broadmeadows is about $200,000. A landowner sold a piece of vacant land in Southbank to a property developer for $1.05m on 21 May 2021.arrow_forward
- You have been asked by the president of your company to evaluate the proposed acquisition of a new special- purpose truck for $70,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $20,800. Use of the truck will require an increase in NWC (spare parts inventory) of $2 ,800. The truck will have no effect on revenues, but it is expected to save the firm $23,600 per year in before- tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the cash flows for this project bearrow_forwardOn January 1, 2020, a rich citizen of the Town of Ristoni donates a painting valued at $300,000 to be displayed to the public in a government building. Although this painting meets the three criteria to qualify as an artwork, town officials choose to record it as an asset. The gift has no eligibility requirements. These officials judge the painting to be inexhaustible so that depreciation will not be reported. For the year ended December 31, 2020, what does the town report on its government-wide financial statements in connection with this gift? How does the answer to (a) change if the government decides to depreciate this asset over a 10-year period using straight-line depreciation? How does the answer to (a) change if the government decides not to capitalize the asset?arrow_forwardYou have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $20,900. Use of the truck will require an increase in NWC (spare parts inventory) of $2,900. The truck will have no effect on revenues, but it is expected to save the firm $20,300 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Year FCF 0 (62,900.00) Answer is complete but not entirely correct. 2 1 20,195.00 $ 21,707.00 $ 3 38,220.00arrow_forward
- Tree Lovers Inc. purchased 100 acres of woodland in which the company intends to harvest the complete forest, leaving the land barren and worthless. Tree Lovers paid $3,000,000 for the land. Tree Lovers will sell the lumber as it is harvested and expects to deplete it over five years (23 acres in year one, 30 acres in year two, 24 acres in year three, 10 acres in year four, and 13 acres in year five). Calculate the depletion expense for the next five years. Year 1 $ Year 2 Year 3 $ Year 4 Year 5 Prepare the journal entry for year one. If an amount box does not require an entry, leave it blank. %24 %24 %24 %24 %24arrow_forwardHampton Inc. purchased a machine to use in its business. The machine is estimated to have an economic life of 10 (ten) years before it becomes obsolete. The company expects to use the machine for 4 (four) years before it sells the machine to another company. Hampton uses the straight-line depreciation method. Question: How many years should Hampton depreciate this asset over? (4,7,10, or 14)arrow_forwardSunland Company self-insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1970000 per year. The company estimates that on average it will incur losses of $1610000 per year. During 2021, $705000 worth of losses were sustained. How much total expense and/or loss should be recognized by Sunland Company for 2021?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education