On April 30, 2020, Canuck Oil Corp. purchased an oil tanker depot for $ 1,200,000 cash. The company expects to operate this depot for eight years, at which time they will be legally required to dismantle the structure and remove the underground storage tanks. Canuck Oil estimates this asset retirement obligation (ARO) will cost $ 200,000. Assuming a 5% discount rate, to the nearest dollar, the amount to be recorded as the ARO is

Question

Quizplus · Accepted Answer

The correct answer is calculated using the present value formula for the asset retirement obligation (ARO). The future cost of $200,000 is discounted back over the 8-year life of the depot using a 5% discount rate. The formula for the present value (PV) is PV = FV / (1 + r)^n, where FV is the future value ($200,000), r is the annual discount rate (5% or 0.05), and n is the number of periods (8 years). Plugging these values into the formula gives a present value of approximately $135,368 for the ARO.