The acquisition costs of property, plant, and equipment do not include:
Detailed Answer
Correct answer: (D)
Maintenance costs during the first 30 days of use.
8
When selling property, plant, and equipment for cash:
Detailed Answer
Correct answer: (B)
The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold.
9
Which of the following does NOT pertain to accounting for asset retirement obligations?
Detailed Answer
Correct answer: (D)
All of the above pertain to accounting for asset retirement obligations.
10
Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. MMC incurred exploration and development costs of $60 million on the project. MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows:
Cash Outflow - Probability
10 mil - 60%
30 mil - 40%
The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is:
Detailed Answer
Correct answer: (B)
$14.7 million
[The present value(FV=1, I=7, N=3, PV =.8163) of the expected cash flows, that is, 0.81630 x [(.60 x $10 million) + (.40 x $30 million)], which is $14,693,400 or $14.7 million (rounded).]