Asset Retirement Obligation
Burns Company has purchased land that will serve as a temporary repository for nuclear waste. The site will function for 30 years, at which time Burns will be required to completely decontaminate the land. The purchase price for the land is $500,000. Burns knows that the land will have to be decontaminated but isn’t sure which of several possible approaches will be sufficient to reach the level of decontamination necessary by law. The costs of each approach, and the estimated probability that the approach will be the one used, follow:
|
Approach 1 |
10% probability of total decontamination cost of $5,000 at the end of |
|
|
30 years. |
|
Approach 2 |
20% probability of total decontamination cost of $100,000 at the end of |
|
|
30 years. |
|
Approach 3 |
70% probability of total decontamination cost of $1,500,000 at the end of |
|
|
30 years. |
The appropriate interest rate is 8%.
Instructions: Make the journal entries necessary to record the purchase of the land and the recognition of the asset retirement obligation.