On January 1, 2013, Barbosa Company purchased a coal mining site for $1,000,000. Under the terms of the purchase agreement, Barbosa must restore the site to specified conditions at an estimated cost of $125,000. Barbosa estimates that it will be able to operate the site for 20 years. Barbosa uses a 6% discount rate.

Required:

1. Prepare the journal entry necessary to record the purchase of the coal mining site.

2. Prepare any journal entries needed at December 31 with regard to this mining site.

3. Next Level What is the conceptual justification that underlies the accounting for an asset retirement obligation?