Question

On January 1 ten years ago, Andrew Co. created a subsidiary for the purpose of buying an oil tanker depot at a cost of $1,500,000. Andrew expected to operate the depot for ten years, at which time it is legally required to dismantle the depot and remove underground storage tanks. It was estimated that it would cost $150,000 to dismantle the depot and remove the tanks at the end of the depot’s useful life. However, the actual cost to demolish and dismantle the depot and remove the tanks in the tenth year is $155,000What amount of expense should Andrew recognize in its financial statements in year 10?
A. $150,000 expense.
B. $5,000 expense.
C. $155,000 expense.
D. None, recognized in prior years.

Answer 1

Answer:

B. $5,000 expense.

Explanation:

The estimated cost to dismantle the depot and remove the underground storage tanks would be expensed during the 10 years the assets were being used. Only the annual amortization of the estimated costs ($150,000 ÷ 10) plus the additional, unexpected expense $5,000 would be recognized at the end of the assets' lives.