Accounting Question

[joshpoints 10+ year member]

Does anyone know what fundamental accounting principle FASB statement number 143 breaks? It involves asset obligation retirements. For example you have an oil platform in the ocean that has an expected life of 20 years. Federal law requires you remove the oil platform and return the area to its "previous condition". You determine this will cost you $100,000. You must take this $100,000 and determine the discount rate which we will say is 10% and put the $100,000 on your books at its present value as an obligation. So the present value would be $14,864 (rounded to nearest dollar). Every year 10% is added to this balance causing the obligation to increase so $14,864*.1=1,486 making new balance $16,350. This would continue to increase the obligation balance until the end of the 20th year at which time the balance would become $100,000. At the same time this is happening depreciation expense is occurring for the obligation. So (14,864/20)=743. Journal entries look like this: ARO=asset retirement obligation. Apparently the journal entris don't look right when I post it so I'll just type it out.

1/1/04

Asset Debit 500,000

Cash Credit 500,000

Asset Debit 14,864

ARO Credit 14,864

12/31/04

Accretion Exp. Debit 1,486

ARO Credit 1,486

Depr. exp. (for ARO) Debit 743

Accum Depr. Credit 743

12/31/05

Accretion Exp. Debit 1,635------------------------------>(14864+1486)*.1=1635

ARO Credit 1,635

Depr. exp (for ARO) Debit 743

Accum Depr. Credit 743

This continues until end of 20th year then another entry occurs where ARO is reduced.

http://www.fasb.org/pdf/fas143.pdf

Thank you very much. I'm not sure if it is a reliability issue, relevence consistency, comparability etc.?

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[joshpoints 10+ year member]

In that case does anyone know of message boards directed at accounting?

 

[Ignatowski 5,000+ posts]

Thats why I have an accoutant of my own....

To deal with bullshit like above......//content.invisioncic.com/y282845/emoticons/crazy.gif.c13912c32de98515d3142759a824dae7.gif

 

[swimfreak26 10+ year member]

My roomate is an accounting major...if he gets back at a reasonable hour from the library and feels like sharing I'll ask him about it.

I don't count on him being back too soon though...finals week //content.invisioncic.com/y282845/emoticons/frown.gif.a3531fa0534503350665a1e957861287.gif

 

[joshpoints 10+ year member]

My roomate is an accounting major...if he gets back at a reasonable hour from the library and feels like sharing I'll ask him about it.
I don't count on him being back too soon though...finals week //content.invisioncic.com/y282845/emoticons/frown.gif.a3531fa0534503350665a1e957861287.gif

Awesome. I have to turn it in tomorrow night. I think I got all the other items that were required for the paper except this.

 

[4runnercrazy 10+ year member]

im planing to become an accoutant check back in like 6 years //content.invisioncic.com/y282845/emoticons/smile.gif.1ebc41e1811405b213edfc4622c41e27.gif

 

[joshpoints 10+ year member]

im planing to become an accoutant check back in like 6 years //content.invisioncic.com/y282845/emoticons/smile.gif.1ebc41e1811405b213edfc4622c41e27.gif

I'm not. I'm just getting the degree in that area. I want to create some new products get the patents and market them. Accounting will be something to fall back on when I get tired of failing (when I'm 30 broke and still living at home from none of my ideas getting a following). One of the products I estimate will take like 2 years to create. The other will require pretty heavy capital and a compeletely different way of thinking for businesses (not sure if the market is ready for it). I come up with so many I start to forget them. Then I have another that would be directed mainly at consumers. And another idea that I'll probably just try to sell to existing comanies. Shoot I need to try and remember the ones I forgot. Another idea involves sub designs (I'll probably sell this to some company for cheap not really a completely new design just some slight changes that increase reliability).

 

[OdieTRP 10+ year member]

Perhaps the Historical Cost principle. If the obligation is $100,000 now and that is amortized over the next 20 years, that would be $5,000 per year. The recorded amount is net of the discount rate, not the historical cost. I also think depreciation is thrown in there as a diversion. I could be wrong, but that's my best guess.

 

[TheNoodPoopler]

Perhaps the Historical Cost principle. If the obligation is $100,000 now and that is amortized over the next 20 years, that would be $5,000 per year. The recorded amount is net of the discount rate, not the historical cost. I also think depreciation is thrown in there as a diversion. I could be wrong, but that's my best guess.

//content.invisioncic.com/y282845/emoticons/crazy.gif.c13912c32de98515d3142759a824dae7.gif

 

[joshpoints 10+ year member]

Perhaps the Historical Cost principle. If the obligation is $100,000 now and that is amortized over the next 20 years, that would be $5,000 per year. The recorded amount is net of the discount rate, not the historical cost. I also think depreciation is thrown in there as a diversion. I could be wrong, but that's my best guess.

Dam you. You're a day late and historical cost was correct. But according to the teacher the historical cost principle seems to be on its way out and instead Fair value is being used. So is it basically because you are listing the cost at a present value using a discounted rate and writing it up instead of just listing the obligation at the beginning for the full dollar amount of the obligation? Also she said the other problems was the fact that the obligation is capitalized into the asset value. But when you go to sell the asset the person buying the oil platform isn't going to pay you for the clean up obligation as they are going to have to do this themself.