Question

P. 9-11

Pollution remediation costs must be recognized as soon as a government is aware of them and can estimate them.

In Year 1, as a result of routine testing, a city discovers that local wells are polluted. Investigation reveals that the source of the contamination is an abandoned waste dump that the city owns. At a cost of $25,000, the county conducts a feasibility study, as a result of which engineers make the following estimates:

• Cost of acquiring and installing pumps and other equipment will range between $160,000 and $200,000 with the high and low amounts being considered equally likely.

• Cost of removing the waste will be between $100,000 and $140,000 with an 80 percent probability that it approximates the lower amount and a 20 percent probability that it will be near the higher amount.

• Cost of monitoring the site over a 10-year period will total between $180,000 and $220,000 with no amount being more likely than another.

In addition, the city estimates that it will be able to recover $50,000 of the costs from a previous owner of the property. In Year 2, the city acquires and installs the pumps and other equipment at an actual cost of $190,000 and incurs actual waste removal costs of $105,000 (all paid in cash). It also reached a settlement with the previous owner for $45,000 and receives payment in cash.

1. Prepare the entries that the city should make in years 1 and 2 as they would serve as the basis for preparation of its government-wide statements.

2. Suppose instead that the city had acquired the land knowing that it was polluted but with the intention of turning it into a park. Indicate any differences in your entries.

Answer 1