Tyre Recycling Inc. (TRI) was granted a 15 year zero cost lease of land by the provincial government in Murdochville, QC, on which to build a tire recycling plant. Operations began on January 1, 2020. TRI has a December 31 year end, and uses ASPE. After 15 years, (ie: January 1, 2035) the government requires that TRI dismantle the plant and clean up any residual waste material to restore to the initial condition.

You are advised that 70% of the estimated future dismantle/clean-up cost of $5,000,000 was included in the ARO calculation at January 1, 2020 with the other 30% to be incurred equally over each of the 15 years of operation and to be recorded at each fiscal year end only.

The discount rate is 5%.

TRI encountered a major computer hack in 2020, and lost many files required in its financial accounting software- the former controller forgot to perform the backups normally done. It is currently undergoing the annual audit, and the new controller needs your assistance to respond to the auditors re its ARO.

The data recovered show the additional information on ARO:

Balance, ARO, December 31, 2020 ?

Increase in ARO balance for 2020 (includes on-going operations

adding to future clean-up and interest/accretion expense) $134,686

Depreciation expense for plant and ARO for 2020 (using straight line) - $1,312,238

The new controller is anxious for you to answer the following Questions 21-23 based on this information.

[21] What was the amount of ARO recorded on January 1, 2020?

Select one:

a.

$134,686.

b.

$3,500,000.

c.

$1,767,749.

d.

$1,683,570.

e.

Zero since no clean-up was done in 2020.

[22] What was the amount of interest (accretion) expense recorded in 2020?

Select one:

a.

$84,179.

b.

$175,000.

c.

$88,387.

d.

$5,000.

e.

$ 50,507.

[23] How much was the original cost of the tire recycling plant excluding ARO?

Select one:

a.

$19,683,570

b.

$18,000,000

c.

$7,500,000.

d.

$6,400,000.

e.

None of the above.

[24] Assume for this question only that on-going operations in 2020 caused an estimated future clean-up cost of $100,000 and that this amount was accrued at the end of 2020. What would be the journal entry to record this given that the discount rate is 5%.

Select one:

a.

(dr) Accretion expense $50,507; (cr) ARO $50,507.

b.

(dr) Overhead-manufacturing $100,000; (cr) ARO $100,000.

c.

(dr) Tire recycling plant (P,P &E) $50,507; (cr) ARO $50,507.

d.

(dr) Retained earnings $100,000; (cr) ARO $100,000.

e.

None of the above.

[25] Given that depreciation expense for 2020 was $1,312,238 as stated, how much would it be for 2021 based on your answer in #24?

Select one:

a.

$1,315,605.

b.

$1,315,846.

c.

$1,312,238.

d.

$$1,200,000.

e.

None of the above.