Question: Charlie Networks Ltd CNL has a 10 year renewable lease

Charlie Networks Ltd. (CNL) has a 10- year renewable lease contract with Mercator Limited (ML), the owner of a tall building in a major city. CNL is permitted to erect a transmission tower on the top of the building. CNL’s contract with ML requires CNL to dismantle the tower if and when CNL discontinues its use. CNL expects to use the tower for only 10 years due to the rapid advance in transmission technology that is likely to render the tower obsolete in 10 years. The lease payments to ML are $ 180,000 per year. CNL constructed the tower at the beginning of 20X6 at a cost of $ 2,100,000. CNL estimates that dismantling and removal of the tower will cost $ 180,000, at 20X6 current prices. The pre- tax interest rate that reflects risks is 6%. CNL plans to use straight- line amortization; the company’s policy is to take a full year’s amortization in the year of acquisition but none in the year of disposal.

1. Prepare the journal entry to record construction of the tower and the decommissioning cost obligation.
2. Prepare the necessary adjusting entries pertaining to the tower and the decommissioning cost obligation for each of the years ending 31 December 20X6 and 20X7. Assume that there is no change in the estimated cost of the tower’s removal.

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  • CreatedFebruary 17, 2015
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