Purpose: This exercise will review the accounting recognition for an asset retirement obligation.
Silverado Corp. purchased mining equipment with cash on January 1, 2014, at a cost of $3,000,000. Silverado expects to actively extract units from the mine for 5 years at which time it is legally required to perform certain steps to close the mine and remove the mining equipment. It is estimated that it will cost $500,000 to properly dismantle the equipment and close the mine at the end of its useful life. Using an interest rate of 8%, the present value of the asset retirement obligation on January 1, 2014, is $340,290. The estimated residual value of the equipment is zero.
Instructions
(a) Prepare the journal entries to record the acquisition of the mining equipment and the asset retirement obligation for the mine on January 1, 2014.
(b) Prepare any journal entries required for the equipment and the asset retirement obligation at December 31, 2014.
(c) On January 5, 2019, Silverado Corp. pays $481,000 to close the mine and remove the equipment. Prepare the journal entry for the settlement of the asset retirement obligation.