Question

Question 4 Shamrock Industries Limited purchased a strip mine for cash on April 1, 2020 at a cost of $5,306,000. Shamrock expects 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 that it will cost $461,000 to do this at the end of the mine’s useful life. The company’s year-end is December 31, and Shamrock follows ASPE.

Prepare the journal entry to record the purchase of the mine and to record the asset retirement obligation for the mine on April 1, 2020. Based on the effective interest rate of 5%, the present value of the asset retirement obligation (i.e., its fair value) on the date of acquisition is $283,014. (Round answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit Apr. 1, 2020

Prepare any journal entries required for the mine (straight-line depreciation) and the asset retirement obligation at December 31, 2020. The estimated residual value of the mine is zero. (Round answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit Dec. 31, 2020 (To record depletion for the year) (To record accretion expense for the year)

On April 1, 2030, Shamrock paid cash to an environmental firm to restore the mine’s surrounding area to its original state at a cost of $474,000. Prepare the journal entry for the settlement of the asset retirement. (Round answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit Apr. 1, 2030

Answer 1

1.

Date Account Titles Debit Credit Apr. 01 Plant Assets $5,306,000 Cash $5,306,000 (To record the mine) Plant Assets Apr. 01 $283,014 Asset retirement Obligation S283,014 (To record the asset retirement obligation)

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2.

Date Account Titles Debit Credit Dec. 31, 2020 Depreciation expense ($5,306,000/10) Accumulated depreciation $530,600 $530,600 Dec. 31, 2020 Depreciation expense ($283,014/10) Accumulted depreciation $28,301 $28,301 Dec. 31, 2020 Interest expense ($283,014 x 5%) Asset retirement Obligation S14,150.70 $14,150.70

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3.

Date Account Titles Debit Credit Apr. 01, 2030 Asset retirement obligation $461,000 Loss on ARO settlement $13,000 Cash S474,000