Ivanka Trucks-N-Tanks Inc., [ITNT] was given a 16-year zero cost lease of land in Montana by the state government. The company had planned to set up a facility to manufacture tanks, armoured trucks and various other military equipment. The plant was built and began operations on January 1, 2001. [ITNT] uses a December 31 year end, and and has adopted IFRS. After 16 years, (i.e., January 1, 2017), the Montana government mandates that [ITNT] dismantle the plant, clean up all residual waste material and restore the site to its initial natural condition.

You note that the land was leased from the provincial government without cost while the plant and equipment cost $2.4 million. Restoration costs in 16 years are expected to total $650,000, of which $400,000 , caused due to the usage of the plant, is to be recorded equally over the 16 years (and is to be recognized at the end of each year). The balance amount of $250,000 was to be recognized initially when the plant was acquired. The company applies IFRS and has been using an annual interest rate of 5%. All assets are depreciated using the straight-line method.

it is NOW January 1, 2017 and the company is seeking to dismantle all its used equipment and restore the land on which these were installed. The company had earlier, in September, 2016, invited bids for the upcoming restoration. It negotiated terms with Clinton Clearing Contractors, Inc., [CCC] to undertake the job dismantling and restoration . ITNT would pay this job by issuing 900 7% 10-year bonds on January 1, 2017. Interest was payable semi-annually on January 1 and July 1. The market rate on January 1, 2017 was 6%.

The journal entry to record the issue of the bonds on January 1, 2017 would be

a.

DR ARO ........ $900,000; CR Bonds Payable ........ $900,000

b.

DR ARO ........ $250,000; DR Loss on Settlement of ARO ........ $650,000; CR Bonds Payable ........ $900,000

c.

DR ARO ........ $650,000; DR Loss on Settlement of ARO ........ $316,952; CR Bonds Payable ........ $966,952

d.

DR ARO ........ $400,000; DR Loss on Settlement of ARO ........ $566,952; CR Bonds Payable ........ $966,952

e.

None of the above.