On January 1, 2020, Brown Mining Enterprises purchased an existing coalmine. Brown expects to operate the mine for four years (i.e., until the end of 2023), after which it is legally required to dismantle the coalmine. Brown estimates that it will have to pay $500,000 to dismantle the mine and accomplish the other required asset retirement activities such as filling and restoring land etc. at the end of the mine’s life. The applicable general interest rate for Brown is 10% (considering its credit standing and the interest rates on its other borrowings). Prepare the journal entry to record the asset retirement obligation on January 1, 2020 and prepare the journal entries for depreciation and interest expense on december 31, 2020 2. Prepare journal entries for depreciation and interest expense on December 31, 2020.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 1, 2020, Brown Mining Enterprises purchased an existing coalmine. Brown expects to operate the mine for four years (i.e., until the end of 2023), after which it is legally required to dismantle the coalmine. Brown estimates that it will have to pay $500,000 to dismantle the mine and accomplish the other required asset retirement activities such as filling and restoring land etc. at the end of the mine’s life. The applicable general interest rate for Brown is 10% (considering its credit standing and the interest rates on its other borrowings).
Prepare the
2. Prepare journal entries for depreciation and interest expense on December 31, 2020.
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