Asset Retirement Obligation On January 1, Lewis Company purchased land it will u

Question

Asset Retirement Obligation

On January 1, Lewis Company purchased land it will use as a landfill for the next 12 years. The cost of the land was $525,000. At the end of 12 years, Lewis Company will be required to spend $250,000 to landscape and reforest the landfill site. The appropriate discount rate is 9%. Because the useful life of the land is limited in this case, the cost of the land is depreciated. Lewis uses the straight-line method. Compute the amount of depreciation expense and accretion expense in Year 1.

Round your calculations and answers to the nearest whole dollar. Click here to access the FV table to use with this problem.

1) Depreciation expense _____

2) Accretion expense      _____

Explanation / Answer

Depreciation expense = cost /useful life

                                        = 525,000 / 12

                                        = $ 43750

Accretion expense:

Present value of future expense = expense /(1+r)^n

                                                             = 250,000 / (1+ .09)^12

                                                              = 250,000 / 1.09^12

                                                              = 250,000 / 2.81266

                                                              = 88883.83

Accretion expense = 88883.83 *.09 = $ 7999.54

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