Pollution remediation costs must be recognized as soon as a government is aware
ID: 2578319 • Letter: P
Question
Pollution remediation costs must be recognized as soon as a government is aware of them and can estimate them. In Year 1, as a result of routine testing, a city discovers that local wells are polluted. Investigation reveals that the source of the contamination is an abandoned waste dump that the city owns. At a cost of $25,000, the county conducts a feasibility study, as a result of which engineers make the following estimates: • Cost of acquiring and installing pumps and other equipment will range between $160,000 and $200,000 with the high and low amounts being considered equally likely. • Cost of removing the waste will be between $100,000 and $140,000 with an 80 percent probability that it approximates the lower amount and a 20 percent probability that it will be near the higher amount. • Cost of monitoring the site over a 10-year period will total between $180,000 and $220,000 with no amount being more likely than another. In addition, the city estimates that it will be able to recover $50,000 of the costs from a previous owner of the property. In Year 2, the city acquires and installs the pumps and other equipment at an actual cost of $190,000 and incurs actual waste removal costs of $105,000 (all paid in cash). It also reached a settlement with the previous owner for $45,000 and receives payment in cash. 1. Prepare the entries that the city should make in years 1 and 2 as they would serve as the basis for p reparation of its government-wide statements. 2. Suppose instead that the city had acquired the land knowing that it was polluted but with the intention of turning it into a park. Indicate any differences in your entries.
Explanation / Answer
Solution;
1.
Year 1
Pollution remediation expense $ 25,000
Cash $25,000
To record the cost of the feasibility study
Pollution remediation expense $180,000
Pollution remediation obligation $180,000
To record the estimated cost of acquiring pumps and other equipment [(.5 x $160,000 + (.5 x $200,000)]
Pollution remediation expense $108,000
Pollution remediation obligation $108,000
To record the estimated cost of the waste removal [(.8 x $100,000 + (.2 x $140,000)]
Pollution remediation expense $200,000
Pollution remediation obligation $200,000
To record the estimated cost of the monitoring [(.5 x $180,000 + (.5 x $220,000)]
Pollution remediation obligation estimated recovery $ 50,000
Pollution remediation expense –estimated recovery $ 50,000
To record the estimated recovery (For purposes of reporting, both of these would likely be netted against the pollution remediation obligation and expense respectively.)
Year 2
Pollution remediation obligation $180,000
Pollution remediation expense 10,000
Cash $190,000
To record the outlay for pumps and other equipment and adjust for the initial misestimate
Pollution remediation obligation $108,000
Pollution remediation expense $3,000
Cash 105,000
To record the outlay for waste removal and adjust for the initial misestimate
Cash $45,000
Pollution remediation recovery $45,000
To record the recovery. The pollution remediation recovery would be reported as either a revenue or a reduction in an expense.
Pollution remediation expense – estimated recovery $50,000
Pollution remediation obligation – estimated recovery $50,000
To reverse the estimated recovery accounts
Insofar as the entries result in negative revenues, they would presumably be reclassified
as revenues
2. If the city had acquired the land knowing that it was polluted but with the intention of turning it into a park, then the costs would be capitalized and hece added to the cost of the par.