WWF Promotions had acquired a tract of land on Mont Rigo on a fifteen year lease from the Quebec government in 2020. The lease was given free of cost as a grant under a special Social and Arts Development Programme. The company was tasked to set up a park and host different musical bands and dance troupes. The park would contain an arena, a parking lot for incoming automobiles, shops and kiosks catering to tourists’ demands for food, souvenirs, etc. The company was also required to erect structures providing other amenities which would be required by the tourists. The lease came with a requirement that WWF would dismantle and remove all installations, and restore the site to its original environmental condition before or at the end of the lease term of the land. “Here is Entry One with which I recorded the cost of all this construction and equipment,” Mr. Kount, VP finance, indicated. “They have an expected life of 15 years with zero residual value”.

Entry One

Buildings and Equipment $5,000,000

Cash $5,000,000

WWF planned to operate the park for 15 years. On January 1, 2021, WWF opened the park to the public.

You asked Mr. Kount to show you the journal entry he must have prepared to record any Asset Retirement Obligation. “Oh that,” he exclaimed.

“I recall the auditors mentioning something about having to record an amount of $721,530 as being the present value of the future restoration costs which the company had to incur at the end of the 15-year life. However, I simply ignored this totally ridiculous entry. I mean, come on. Who can foresee the exact costs 15 years from now? And then to top it all, they even asked me to prepare another entry on December 31, 2021, to record an amount of $36,076.50 for interest expense on the asset retirement obligation. Did they think I was crazy? There simply was no obligation whatsoever which the company actually owed and so I ignored that as well.

I depreciate all assets using the straight-line method.”

Required:

i] Prepare the journal entry, in proper format, required to record the asset retirement obligation on January 1, 2021.

ii] Determine the annual discount rate used for which was used to determine the amount of the retirement obligation, as indicated above on January 1, 2021.

iii] Determine the estimated future cost of the restoration to be incurred at the end of the life of the equipment.

iv] Determine the depreciation expense for the year to be recorded on December 31, 2021.

v] Next, Mr. Kount urged you to assume that you were NOW on January 1, 2036. WWF had decided to dismantle all of the construction and equipment and restore the land which it had leased from the government. The company’s plan was to accept a bid from Rework Engineers, Inc., and on that date, issue 1,800 of 5 year, 4% $1,000 bonds dated January 1, 2036 as compensation, with interest paid semi-annually. An interest rate of 6% was agreed upon as the effective yield rate.

Prepare the journal entry required to record the settlement of the Asset Retirement Obligation on January 1, 2036.

[HINT: You will need to compute the issue price of the bonds on January 1, 2036].

Assume for Question [vi] that ASPE is being applied. Further assume that during 2021, it was determined necessary to accrue an additional amount of $18,000 for restoration costs which was attributed to the operations of the park activities. Assume these costs accrued on December 31, 2021.

vi] Prepare the journal entry, in proper format, required to record this additional amount of retirement costs on December 31, 2021.