Problem
HOLO purchased a strip mine for cash on April 1, 2023 at a cost of $5,000,000. They expect to operate the mine for 10 years, at which it is legally required to restore the surrounding area to its original state. It is estimated to cost $450,000 to do this. Company year end is Dec31 and company follows ASPE.
• Write the journal entry to record the purchase of the mine and to record the asset retirement obligation for the mine on April 1, 2023. Based on the effective interest rate 5%, the present value of the asset retirement obligation on the date of acquisition is $276,261.
• Write any journal entries required for the mine (straight line depreciation) and the asset retirement obligation at Dec31, 2023. Estimated residual value of mine is 0. (One entry to record depletion for the year, another for accretion expense for the year)
• On april 1, 2033, HOLO paid cash to an environmental firm to restore the mine's surrounding areas to its original state at a cost of $460,000. Make the journal entry for the settlement of the asset retirement.