[thebusyone]

Hi all,

This question was one of the 2012 released questions, but I don’t understand why “a” is the correct answer. Does anyone know?

At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk- free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?

a. $10,000 b. $50,000 c. $95,000 d. $100,000

______________________
BEC - 4/4/11 - 83
REG - 1/4/12 - 82
AUD - 2/18/12 - 77
FAR - 5/31/12 ? 88
Ethics - 6/13/12 - 95

[ledgermaven]

My notes say that accretion expense is the asset retirement obligation balance x the interest rate used at initial measurement. Since the ARO is a pv of future cost to retire the asset, the credit adjusted risk free interest rate is the best choice, and $100,000 x .10 = $10,000. The journal entry would look like this

Accretion expense 10,000

Asset Retirement Obligation 10,000

Next year the ARO will be 110,000 x .10 and accretion expense will be $11,000. It works like bond interest, always going up toward the final amount expected to be paid. The carrying cost of the asset is red herring information and is showing the depreciation of 1,000,000 over 20 years with 50,000 less in carrying value. This was a good review for me to look up.

Good luck!

[Author]

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