How will rrcorp record the restoration costs

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Reference no: EM131942429

Reynolds Resources acquired mineral rights for oil and gas in North Dakota and developed a series of well it calls WildcatFeild (remarkably, all wells drilled were successful!). Acquisition, exploration and development costs totaled $9 million.

The wells are estimated to contain 1,500,000 barrels of oil. Extraction activities began on January 1, 2015. After the oil is extracted in approximately 30 years.

Reynolds Resources is obligated to restore the land to its original condition, including water table remediation. The company's controller has provided the following three cash flow possibilties for the restoration costs:

Cash Flow	Probability
$1,000,000	20%
$3,000,000	20%
$4,000,000	60%

The company's cost of capital is 5%, and its fiscal year ends on December 31. In 2015, the wells produced 80,000 barrels of oil. In 2016, the wells produced 90,000 barrels of oil.

The inital value recored for Wildcat Feild was $9,740,708, after consideration of the ARO.

1. Show how the asset retirement obligation accretion expense will be recorded in 2016.

2. What is the reported value of Wildcat Feild and the asset retirement obigation on RRCorp's December 31, 2016 Balance Sheet?

3. Assume that restoration costs incurred in 2045 totaled $3,000,000 . How will RRCorp record the restoration costs (assuming no change in USGAAP)?

Reference no: EM131942429

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