On January 1, Staley Utilities Company acquired a power plant at a total cost of
ID: 2334414 • Letter: O
Question
On January 1, Staley Utilities Company acquired a power plant at a total cost of $23,580,000, and paid cash. The estimated cost (in today's market) to dismantle the plant and restore the property at the end of the plant's 15-year life is $4,859,000 Staley's cost of capital is 2. Staley will depreciate the asset over its useful life using the straight-line method. The asset has no residual value.
Requirements:
a.
Prepare the journal entries required to record the acquisition of the plant asset.
b.
Prepare the journal entry to record the first year's depreciation and accretion accrual. Now journalize the first year's accretion accrual.
c.
Prepare the journal entries required to record the disposal of the asset and the settlement of the asset retirement obligation at the end of the fifth year after acquisition. Staley sold the asset for $16,007,000 and the costs of dismantling the plant and restoring the property totaled $5,420,000. Begin by journalizing the disposal of the asset at the end of the fifth year after acquisition. Now journalize the settlement of the asset retirement obligation at the end of the fifth year after acquisition.
a.
Prepare the journal entries required to record the acquisition of the plant asset.
b.
Prepare the journal entry to record the first year's depreciation and accretion accrual. Now journalize the first year's accretion accrual.
c.
Prepare the journal entries required to record the disposal of the asset and the settlement of the asset retirement obligation at the end of the fifth year after acquisition. Staley sold the asset for $16,007,000 and the costs of dismantling the plant and restoring the property totaled $5,420,000. Begin by journalizing the disposal of the asset at the end of the fifth year after acquisition. Now journalize the settlement of the asset retirement obligation at the end of the fifth year after acquisition.
Explanation / Answer
a Journal entry to record the acquisition of the plant asset Date Account title Debit Credit 1-Jan Power Plant $23,580,000 Cash $23,580,000 b Journal entry to record first year's depreciation Date Account title Debit Credit 31-Dec Depreciation expense $1,572,000 Accumulated depreciation-Power palnt $1,572,000 Cost of Power plant $23,580,000 Useful life 15 Depreciation each year $1,572,000 Now we will caluculate the present value of asset retirement obligation Cost of dismantling and restoring the property $4,859,000 Cost of capital 2% Present value of $1 @ 2% on year 15 0.74301 Present value of asset retirement cost $3,610,286 Journal entry to record accretion accrual Date Account title Debit Credit 31-Dec Asset retirement cost $3,610,286 Asset retirement obligation $3,610,286 Journal entry to record first year's accretion accrual 31-Dec Accretion expense ($3610286 x 2%) $72,206 Asset retirement obligation $72,206 31-Dec Depreciation expense $240,686 Accumulated depreciation-asset retirement cost $240,686 c Journal entry to record disposal of the asset Date Account title Debit Credit 31-Dec Cash $16,007,000 Accumulated Depreciation-Power plant $7,860,000 Gain on disposal of asset $287,000 Power plant $23,580,000 Cost of Power plant $23,580,000 Depreciation for 5 years $7,860,000 Book value after 5 year $15,720,000 Sale price $16,007,000 Gain on sale of asset (16007000-15720000) $287,000 Journal entry to record the settlement of asset retirement obligation 31-Dec Asset retirement obligation $3,986,047 Accumulated Depreciation-Asset retirement cost $1,203,429 Loss on settlement $3,840,810 Cash $5,420,000 Asset retirement cost $3,610,286 Asset retirement obligation balance Accretion expense Balance at the end Beginning Balance Year 1 $3,610,286 Year 1 $72,205.72 $3,682,491.72 Year 2 $73,649.83 $3,756,141.55 Year 3 $75,122.83 $3,831,264.39 Year 4 $76,625.29 $3,907,889.67 Year 5 $78,157.79 $3,986,047.47