ARO related expense related, interest, expected, effective, liability

sabina

A company expects to use a landfill site for 10 years at the end of which it will have to cap and close the landfill at an expected cost of $2.8 million. Given that the effective interest rate is 8%, the company's total ARO related expenses in Year 2 are closest to:

A. $250,714
B. $121,020
C. $224,776

Answer: A.

Present value of liability= $1,296,941
Depreciation= $1,296,941/10 = $129,694
Carrying value of liability in Year 2= $1,400,697
Accretion Expense in Year 2= $112,055

Can someone explain why they used $121,020 instead of $112,055?



Edited 1 time(s). Last edit at Wednesday, November 24, 2010 at 06:55PM by notic4lyf.

soddy1979

This is definitely an error. Accretion expense for year 2 is coming $112,055 and total ARO related expenses are coming $241,750.

They have taken accretion expense for year 3 which is $121,020 in their calculation which would be wrong.

Bulla564

I dont know but when they say, the answer is closest to.... maybe they are giving a margin of error..... dunno

JPSem

SpyAli Wrote:
-------------------------------------------------------
> This is definitely an error. Accretion expense for
> year 2 is coming $112,055 and total ARO related
> expenses are coming $241,750.
>
> They have taken accretion expense for year 3 which
> is $121,020 in their calculation which would be
> wrong.

Thanks Ali that's what I figured. I guessed A only because the "correct" answer wasn't an option.

jim8z3

Where is this question from?

pogo

ARO calculations are not tested in the exam

LokiDog2

not tested?

leadcfa

yes. we are not required to do ARO calculations on exam (LOS 37g), but we need to know the accounting for AROs and its impact on financial statements.