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.

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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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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