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Chapter 13: Q26Q (page 658)

Question: When must a company recognize an asset retirement obligation?

Short Answer

Expert verified

Answer

A company recognizes asset retirement obligation when:

  1. There is an existence of legal obligation against the asset.
  2. The amount of liability can be estimated.

Step by step solution

01

Definition of Asset Retirement Obligations

The obligations that a business entity will incur at the time of retirement of a fixed asset are known as asset retirement obligations. Such obligations must be included in the financial statements of the business entity to reflect the correct financial position.

02

Conditions under which the company must recognize the asset retirement obligation

The business entity must recognize the assets retirement obligation when the business entity has a legal obligation against the retirement of fixed assets, and the obligation related to the retirement can be estimated. Such obligation is recorded at its fair value.

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Most popular questions from this chapter

Explain the accounting for a service-type warranty.

On December 21, 2017, Zurich Company provided you with the following information regarding its trading investments.

December 31, 2017

Investments (Trading) Cost Fair Value Unrealized Gain (Loss)

Stargate Corp. shares \(20,000 \)19,000 \((1,000)

Carolina Co. shares 10,000 9,000 1000

Vectorman Co. shares 20,000 20,600 600

Total of portfolio \)50,000 \(48,600 \)(1,400)

Previous fair value adjustment balance-0-

Fair value adjustment-Cr. \((1,400)

During 2018, Carolina Co. shares were sold for \)9,500. The fair value of the shares on December 31, 2018, was Stargate Corp.

shares-\(19,300: Vectorman Co. shares-\)20,500

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2017.

(b) Prepare the journal entry to record the sale of the Carolina Co. shares during 2018.

(c) Prepare the adjusting journal entry needed on December 31, 2018.

Explain the accounting for an assurance-type warranty.

CA13-7 ETHICS (Warranties) The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of \(600 per month plus 5% of yearly profits over \)500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and warranty costs in order to keep profits at $475,000.

Instructions

Answer the following questions.

(a) Should Hamilton follow his boss’s directive?

(b) Who is harmed if the estimates are increased?

(c) Is Matt Rich’s directive ethical?

How are the terms “probable,” “reasonably possible,” and “remote” related to contingent liabilities?
See all solutions

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