Question

On May 15, 2019 Boise Inc. (BMS) paid 320m cash for a thallium smelter. The company engineers estimated that the facility would have a 16 year service life and that its retirement in accordance with then-current Idaho environmental regulations would cost 80m. The risk free rate was 2.8% and BMS, a BB- credit, expects a 550 bps credit spread to rF.

On March 1, 2025 BMS sold the smelter for 190m. The buyer paid cash and assumed the ARO.

QUESTION: Book the 2025 03 01 transfer journal entry. Assume that BMS accountants depreciate the smelter SLN with zero salvage, that discounting was calculated on a continuously compounded basis and that the ARO assumptions hd not changed.

Answer 1

Answer :

Cash paid to purchase Thallium Smelter	$320.00 m
(+) PV of retirement cost (Note)	$21.20 m
Total cost of the asset	$341.20 m

Working Note

The appropriate compound interest formula is

Present value = Ae^-rt

Where, A = amount paid at the end of tenure = $80 m

Where, r = rate of interest = (2.80 + 5.50)% = 8.30%

Where, t = tenure = 16 years

Using the above formula,

PV = 80m^* e^-0.083*16

PV = 80m^* e^-1.328

PV = 80m^* 0.265

PV = 21.20m

Computation of Book value of machine on March 1,2025

Total cost	$341.20 m
Salvage value	0
Expected useful life (n) (16*12)	192 months
Period in use (from may 15,2019 to Mar 1,2025	69.5 months
Depreciation upto Mar 1,2025 (341.20*69.50/192)	$123.51 m
Book value as on Mar 1, 2025 (341.20 - 123.51)	$217.69 m
(-) Cash received on sale	$-190.00 m
Loss on transfer (217.69 -190)	$27.69 m

Journal
Date	Particulars	Debit (in $ m)	Credit (in $ m)
01 Mar.25	Cash	190.00
	Accumulated Depreciation	123.51
	Loss on sale of asset	27.69
	Thallium Smelter Machine		341.20
	(To transfer of smelter machine for cash)