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, 2016. The contract requires Hazelton to restore the land and surrounding area to their 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 an accounting standard 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: Cash Outflow Probability $3 million 20% 4 million 30% 5 million 25% 6 million 25% 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: With reference to relevant accounting standards, explain how to measure assets retirement obligations and how to account for assets retirement obligation. Determine the capitalized cost of the coal mine (what should be the initial costs of the coalmine?) Prepare a summary journal entry to record the acquisition costs of the mine. How much interest expense will the company record in its income statement for the 2016 fiscal year, related to this transaction? 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. Describe to Alice the necessary disclosure requirements for the obligation.

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, 2016. The contract requires Hazelton to restore the land and surrounding area to their 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 an accounting standard 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: Cash Outflow Probability $3 million 20% 4 million 30% 5 million 25% 6 million 25% 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: With reference to relevant accounting standards, explain how to measure assets retirement obligations and how to account for assets retirement obligation. Determine the capitalized cost of the coal mine (what should be the initial costs of the coalmine?) Prepare a summary journal entry to record the acquisition costs of the mine. How much interest expense will the company record in its income statement for the 2016 fiscal year, related to this transaction? 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. Describe to Alice the necessary disclosure requirements for the obligation.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The company controller, Alice Cushing, is not sure how to account for the restoration costs and has asked your advice. Alice is aware of an accounting standard 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:

Cash Outflow	Probability
$3 million	20%
4 million	30%
5 million	25%
6 million	25%

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:

With reference to relevant accounting standards, explain how to measure assets retirement obligations and how to account for assets retirement obligation.

Determine the capitalized cost of the coal mine (what should be the initial costs of the coalmine?)

Prepare a summary journal entry to record the acquisition costs of the mine.

How much interest expense will the company record in its income statement for the 2016 fiscal year, related to this transaction?

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.

Describe to Alice the necessary disclosure requirements for the obligation.

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