CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Assume U.S. GAAP. A company acquires a manufacturing facility in which it will produce toxic chemicals. The cost of the facility (exclusive of the underlying land) is $25 million and it is expected to provide a 10-year useful life, after which time the company will demolish the building and restore the underlying land. The cost of this restoration and cleanup is estimated to be $3 million at that time. The facility will be amortized on a straight-line basis. The company's discount rate associated with this obligation is 6.25 percent. The total expense that will be recorded in the first year associated with the asset retirement obligation on this property is closest to ______.
A. $224,945
B. $163,618
C. $265,879
Explanation: The PV of the future cleanup costs = 1,636,183 (FV = 3,000,000; N = 10; I/Y = 6.25; PMT = 0; CPT PV). The firm will record asset retirement costs of $1,636,183 as part of the cost of the property and a corresponding ARO liability of $1,636,183. The asset retirement costs will be amortized at the same rate as the property (10 years, straight-line) and an accretion expense representing the change in the ARO liability will also arise.

Depreciation expense: 1/10 x 1,636,183 = $163,618
Accretion expense: 6.25% x 1,636,183 = $102,261
Total expense: $265,879

User Contributed Comments 2

User Comment
sarasyed5 what is accretion expense?
etrefemme this Q is complicated. I hope the exam does not include anything that long.
You need to log in first to add your comment.