Question

P

Pluviem 1 (30): Given: On June 15, 2020 Boise Mechanical Systems, Inc. (BMS) paid $ 230 m cash for a Thallium smelter. The company engineers estimated that the facility would have a sixteen-year service life and that its retirement in accordance with then-current Idaho environmental regulations would cost $60 m. The risk-free rate was 2.4% and BMS, a BB- credit, expects a 470 bps credit spread to rf. On March 1, 2026 BMS sold the smelter for $120 m. The buyer paid cash and assumed the ARO. Required: Book the 2026 03 01 transfer. Assume that BMS accountants depreciated the smelter SLN with zero salvage, that discounting was calculated on a continuously compounded basis and that the ARO assumptions had not changed. Journal entry for 2026 transfer: Face Value

Please help me figure out how to do the journal entry for the 2026 transfer?

Answer 1

On June 15, 2020 Asset will be capitalized = ( Cost + Present value of Asset Retirement Obligation) = $ 250 m

Cost = $ 230 m

Present value of Asset Retirement Obligation = $ 20 m [ 60 / (1+0.071)^16 ]

Credit-adjusted risk-free rate = 7.10% [2.40 + 4.70]

Service life of Asset = 16 Years

Depreciation per year $ 15.625 m [250/16]

Total Depreciation charged till March 01, 2026 = $ 89.193

On March 01, 2026 below could be entry for transfer of Assets

Date	Description	Debit ($ m)	Credit ($ m)
01-Mar-26	Fixed Asset		250.0000
01-Mar-26	Accumulated Depreciation	89.1930
01-Mar-26	Asset Retirement Obligation	29.6125
01-Mar-26	Cash / Bank	120.0000
01-Mar-26	Loss of disposal of asset	11.1945

Depreciation Schedule / Working, based on SLM

Period		Months	Depreciation	Accumulated Depreciation	NBV of Asset ($ m)
15-Jun-20	31-Dec-20	6.5	8.4640	8.4640	241.5360
01-Jan-21	31-Dec-21	12	15.6250	24.0890	225.9110
01-Jan-22	31-Dec-22	12	15.6250	39.7140	210.2860
01-Jan-23	31-Dec-23	12	15.6250	55.3390	194.6610
01-Jan-24	31-Dec-24	12	15.6250	70.9640	179.0360
01-Jan-25	31-Dec-25	12	15.6250	86.5890	163.4110
01-Jan-26	01-Mar-26	2	2.6040	89.1930	160.8070

Interest / Asset Retirement Obligation Liability working

Period		Months	ARO (Opening Balance)	Interest Charge	ARO (Closing Balance)
15-Jun-20	31-Dec-20	6.5	20.0000	0.7692	20.7692
01-Jan-21	31-Dec-21	12	20.7692	1.4746	22.2438
01-Jan-22	31-Dec-22	12	22.2438	1.5793	23.8231
01-Jan-23	31-Dec-23	12	23.8231	1.6914	25.5145
01-Jan-24	31-Dec-24	12	25.5145	1.8115	27.3261
01-Jan-25	31-Dec-25	12	27.3261	1.9401	29.2662
01-Jan-26	01-Mar-26	2	29.2662	0.3463	29.6125