Recently, companies have been ordered by governmental agencies to clean up environmental damages caused by business operations.How should costs incurred in these situations be treated?
A) If a legal obligation exists, the cost of restoring the property must be added to the asset account.
B) As an expense entirely in one accounting period.
C) As an amortized expense in the period the cost is incurred.
D) Added to the asset, and then depreciated over 15 years.

Question

Quizplus · Accepted Answer

If there is a legal obligation to clean up environmental damages, the cost of restoring the property should be added to the asset account. This is because the restoration of the property will provide future economic benefits to the company, and thus should be capitalized as an asset. The capitalized cost should then be depreciated over the useful life of the asset. However, if there is no legal obligation, the cost should be treated as an expense in the period it is incurred.

Recently, Companies Have Been Ordered by Governmental Agencies to Clean