asset retirement costs quizlet

The 2-Fund Portfolio 143 affects, retirement costs far exceed salvage, resulting in what some industries refer to as negative net salvage and also yielding a depreciable base—original cost plus estimated removal costs less estimated salvage—that exceeds the long-lived asset’s original cost. Part of the purchase agreement requires Clayton to restore the site to a condition suitable for recreational use at the end of its life, which is estimated to be in four years. A retirement unit establishes a physical dividing line by which costs of major work related to plant and equipment are capitalized. Does depreciation represent a decrease in FMV in such cases? When the FASB issued FIN 47, it clarified that the presence of some uncertainty about the timing of an asset-retirement is not an exemption from having to apply FAS 143. If not, when an asset is depreciated, what is being used up? Unlike the ARO's an environmental obligation is not associated directly with an asset. The modified accelerated cost recovery system (MACRS) is the proper depreciation method for most assets. With extra-ordinary repairs for an asset, the amount of depreciation is affected how? should be done at the end of the year and more frequently if market conditions suggest; What are the five reasons assets can become impaired? The capitalized asset retirement cost is allocated in a systematic and rational manner as depreciation expense over the estimated useful life of the asset. The cost to remove the asset is $500. These calculations appear in the following table: Quantity. The retirement quantity is 50 percent of the asset quantity, and the system uses this percentage to calculate the asset's retirement amount. In Year 3, Quarter 3, you sell the asset for $2,000. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. Fundamentals of Asset Management 5 Concepts of cost particularly useful to AM Current replacement cost - The full cost to replace an asset in its current operating environment Life cycle cost - The total cost of an item throughout its life, including the costs of planning, design, acquisition, operations, maintenance, and How is the annual accretion expense and corresponding increase to asset retirement obligation (ARO) found? IAS 38 outlines the accounting requirements for intangible assets, which are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). Asset Retirement Obligation Definition: An accounting rule established by Financial Accounting Standards Board Rule No. When does an environmental liability need to be accrued? Cost of land and natural resource rights $200,000 Costs to dismantle, reclaim, remove, etc. Even if you have an attorney and financial advisor advocating… Fixed assets—also known as tangible assets or property, plant, and equipment (PP&E)—is an accounting term for assets and property that cannot be easily converted into cash.The word fixed indicates that these assets will not be used up, consumed, or sold in the current accounting year. The asset cost is $4,000, the life is 4 years, and you are using straight-line depreciation. Related Courses Fixed Asset Accoun . Figure 2: Projection of Sam’s retirement assets using Strategic Asset Allocation and market history 0 200,000 400,000 600,000 800,000 1,000,000 0 5 10 15 20 25 30 Years from now Portfolio Value 0 200,000 400,000 600,000 800,000 1,000,000 0 5 10 15 20 … In other words, when the liability is incurred and is estimable, the ARO is recognized. The rationale for capitalizing such costs to the asset is that the retirement activities are integral to the operation of the asset. ARO and the amount is to be recognized at the time the cost becomes reasonably estimable. DDB assumes asset is used more in its earlier life than in its later life; AKA - accelerated method. Quarry Corp. has the following costs related to a mine it acquired this year. What amount does the asset retirement obligation increase to over time? A retirement … c. depreciable cost; should equal accumulated depreciation, The book value should equal _______ at the end of it's useful life. Asset retirement obligation involves the retirement of a long-lived asset that depends on a future event beyond the control of an obligated party. Assume a company uses the sum-of-the-years'-digits depreciation method for an asset with a useful life of 4 years. Yet there still can be confusion surrounding the accounting for fixed assets. Such future costs include the cost of dismantling an asset, removal, site reclamation, nuclear decommissioning and closing mines. For most of the assets Statement no. Generally-accepted accounting standards (GAAP) require the company to include the present value of the expected (face value of) future decommissioning cost in the total acquisition cost of the asset. If the fair value can be measured, the loss is the difference in the asset's book value over its fair value. The process of allocating the cost of a plant asset over its useful life is called _________. If the cost is 500.00, the retirement amount is calculated as 50 percent of 500.00, which is 250.00. Construction cost of the item, which can include labor and employee benefits What are the two parts of an impairment test? Get all of Hollywood.com's best Celebrities lists, news, and more. . The computation for depreciation needs to be _____ and _____. the asset's cost less its estimated residual value. Saving for retirement is one of the most important things you can do when it comes to financial planning. When the liabilities are both probable and reasonably estimable. qualify as an expenditure for the purpose of capitalizing interest. A plant asset is considered to be impaired when: f. An estimate of its total undiscounted future cash flows are less than the asset's book value. KEY POINTS Even if two assets appear to have the same value, taxes can make one worth less than the other at the time of valuation. In both 20X4 & 20X5, 2 million tons were extracted and sold. Start studying Asset Retirement Obligation - Ch 11. IAS 16 outlines the accounting treatment for most types of property, plant and equipment. The costs to assign to a fixed asset are its purchase cost and any costs incurred to bring the asset to the location and condition needed for it to operate in the manner intended by management. Learn vocabulary, terms, and more with flashcards, games, and other study tools. We may fantasize about international adventures or beachside escapes, but rarely do we lay the groundwork for realizing our retirement dreams financially. Purchased a machine on 1/1/X3 for $1K. Such future costs include the cost of dismantling an asset, removal, site reclamation, nuclear decommissioning and closing mines. How does it affect residual value or useful life? Assume Clayton estimates the mine will yield 10 million tones of coal. This amount is debited to the asset and credited to the ARO. As a natural resource expected to be sold to customers is depleted but not yet sold, which account should be debited? Depreciation is a contra-account that is subtracted from the cost of the asset to arrive at a book value. ABC Inc. Depreciation expense is the cost to use assets, which are in place to produce revenue. Assuming it has already been established a plant asset is impaired, which of the following statements best describes how the loss is measured? Asset retirement obligation/decommissioning cost broadly refers to the amount that a company expects to incur in disposing of the asset and reversing modifications made to the installation site. Costs to extend the life of or replace the retirement unit should be capitalized. These repairs are estimated to extend the useful life by an additional 4 years (to a total of 9 years). What's the idea behind units of activity method? no; asset's cost is being used up (NOT market value), False; allocation of cost over to income statement. An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset.The liability is commonly a legal requirement to return a site to its previous condition. Even the most thoughtful investor may overlook certain costs that will affect their retirement strategy and overall income needs. How much is capitalized to the asset retirement obligation? The probability-weighted cash flows incorporates risks and uncertainties regarding the future obligation. There are, after all, more immediate concerns: job, kids, mortgage payments, car paymentsthe list goes on. The asset uses a retirement convention and depreciation method which take depreciation in the period of retirement. The organization can capitalize and then expense one-tenth of the asset-retirement costs each year.) Which of the costs below are subject to depreciation over time? measure fair value, then the probability-weighted estimates of future cash flows are discounted using a credit-adjusted risk-free rate. The exact impairment analysis will depend on what? ASC 410-30 addresses the accounting and reporting for environmental obligations. What should be the fraction used to compute depreciation expense in the first year of the asset's life? When establishing their asset allocation, retirees should take into consideration many factors, the first of which is the cost of retirement. Depreciation Expense for the 1st TWO years: When should impairment tests be done for long lived assets? What is it also known as? d. included in the carrying amount of the related long-lived asset. Extra-ordinary repairs CHANGE depreciation & residual value & useful life. 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